Lanka's Central Bank Agonizes Over Runaway Expenditure, Decreasing Income

A combination of international and domestic factors had resulted in the Sri Lankan economy seeing a decline in 2015.

Published: 26th April 2016 08:30 PM  |   Last Updated: 26th April 2016 08:31 PM   |  A+A-

COLOMBO: A combination of international and domestic factors had resulted in the Sri Lankan economy seeing a decline in 2015 as compared to 2014, as per the report of the island nation’s Central Bank for the year 2015.

The report presented to President Mathripala Sirisena by Governor Arjuna Mahendran here on Tuesday, expressed dismay over runaway expenditure and decreasing income at home when the international economic situation was none too good.

Gross official foreign exchange reserves declined to US$ 7.3 billion from US$ 8.2 billion. The Balance of Payments deficit stood at US$ 1.4 billion and the Lankan rupee had depreciated 9.3 percent in relation to the US dollar.

The budget deficit stood at 7.4 percent of the GDP in 2015, while it was 5.7 percent of the GDP in 2014. This made a mockery of the Sirisena-Wickremesinghe government’s plan to bring the deficit to 4.4 percent of the GDP. Government Debt increased to 76 percent of the GDP from 70.7 percent of the GDP in 2014. National Savings declined to 27.8 percent of GDP from 29.5 percent of the GDP an year earlier.

The unemployment rate increased from 4.3 percent to 4.6 percent due partly to a decline in employment opportunities in the Middle East and partly due to a lack of skills among high school leavers. There had been a 12.4 percent drop in departures for foreign employment.

The Central Bank attributed these developments to both international and domestic factors. There had been a slow down in the traditional markets for Lanka’s traditional exports. There was a flight of foreign finance capital due to the strengthening of the US market. The crises in the Middle East brought down remittances. International debt repayment requirements were more than expected.

Domestic Factors

Domestically, the expanded public sector led to a huge recurrent expenditure on salaries. This triggered a growth in demand for consumer goods which in turn led to increased imports and a surge in bank credit. An improvement in the supply side resulted in higher consumer expenditure.

Tax collection, as always, was poor, and taxes planned in the new government’s first budget had to be abandoned for political reasons.

Prescriptions

In its policy prescription, the Central  Bank has pitched for long term measures. The State Owned Enterprises would have to perform and adopt market oriented pricing policies, it said. And there ought to be greater private sector participation in the public sphere. Agriculture has to be diversified and new skills will have to be imparted to the labor force.

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