Sri Lanka sees some recovery in state revenues in 2021, but spending picks up



ECONOMYNEXT – Sri Lanka saw some recovery in government revenues in the first four months of 2021 as the economy operated with minimal control of the coronavirus, but spending accelerated rapidly compared to 2019, before a fiscal “stimulus”, according to official tax data.

Sri Lanka collected 116.2 billion rupees in tax and non-tax revenue in January 2021, down 22% before a fiscal “stimulus” in December 2019, where taxes were cut without parliamentary approval, according to the data.

In 2020, 138.6 billion in revenue was collected.

February revenue of 127.2 billion rupees was down 17% from the 2019 level of 149.9 billion in 2019 and 179.1 billion in 2020.

In March 2021, revenues rebounded to 142 billion rupees, slightly higher than 138.6 billion rupees in 2019, before tax cuts.

However, by March 2021, current expenditure had increased from 138 billion rupees to 308 billion rupees in 2019.

Current spending in the first four months fell from 750 billion rupees to 890 billion rupees in 2019.

Supplementary Estimates have been presented to further increase spending.

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Sri Lanka cut taxes in December 2019 as part of a fiscal ‘stimulus’, also cut rates and started pumping money at an unprecedented rate in 2021 as part of a ‘stimulus’. »Monetary blowing up the balance of payments.

Cash injections through massive treasury bill acquisitions were made despite Sri Lanka having to repay debt and have a low credit rating and similar injections in 2015, 2018, triggering debt crises. exchange.

The cash injections were made partly to compensate for the loss of income and partly to defend a golden interest rate model based on the extraordinary idea that money printing will reduce the total government interest bill and therefore the deficit.

However, the defense of interest rates in gilts markets not only monetized current debt, but also turned the debt maturing from past years into liquidity (reserve currency), triggering a rapid collapse of the balance of payments.

The injections from around August 2019, which ended the contraction in sales of securities held by the central bank and then reversed it, had already canceled the collection of monetary reserves when the fiscal and monetary stimulus was launched. from December.

The classics traded the problem for the failure of John Maynard Keynes, a British Treasury official, to understand the connection between the trade deficit, domestic credit and international payments in the late 1920s, generally described as the problem of “Transfer”.

The error was illustrated in a 1929 debate between Keynes, Swedish economist Bertil Ohlin and French economist Jacque Reuff.

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He believed that there was a “transfer problem” in financial payments in foreign currencies, while classical economists insisted that there was only a “budget problem” and that as long as the State collected money through taxes and borrowing, the necessary foreign currency would be available. through a compensatory reduction in consumption, credit and investment.

The confusion also extends to a general mercantilist obsession with the trade deficit (then called the trade balance) that neo-mercantilists extended to the current account deficit.

A trade or current account surplus, mainstream economists pointed out, was a consequence of the sterilization of the central bank (deflationary policy) and external payments, including loans.

Keynes also failed to understand that domestic investment or the consumption of public or private capital flows triggered a trade or current account deficit. (Colombo / Aug 13/2021)



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