COVID-19 crisis blows hole in Budget 2021

Deficit to widen to 8.3 % of GDP from 7.5 % in 2020

The Finance Ministry is now making preliminary arrangements in the challenging process of preparing Budget 2021 in accordance with the government’s National Policy Framework ‘Vistas of Prosperity and Splendour’.

The Appropriation Bill will be presented in Parliament in October in line with general practice and the comprehensive budget 2021 will be presented, the following month, in November.

The 2021 budget is being prepared according priority to tackle short-term needs while formulating a framework for inclusive (employment–generation) and sustainable growth introducing an effective safety net for the poor in the medium term.

The new budget preparation has commenced for the fiscal year 2021 with the active involvement of seven departments of the Treasury including national planning, fiscal policy, trade, tariff and investment etc.

The Treasury expects the budget deficit to widen in its 2021 fiscal year to 8.3 per cent of GDP from 7.5 per cent of GDP this year according to a Ministry of Finance estimate in a Parliamentary document, as the economy reels from the coronavirus outbreak.

This means some of the public expenditures which will be estimated for 2021 will have to be trimmed to contain the fiscal impact and maintain at least 4.5 to 5 per cent deficit in the upcoming 2021 budget, a senior Treasury official said.

He emphasised that the Treasury is committed to curtailment of public expenditure to contain the fiscal deficit within limits.

A ‘Budget Circular will be issued soon and thereafter budgetary meetings will be held with ministry officials to prepare estimates of budgetary allocations.

Sri Lanka has around 1,300

Government institutions coming under the purview of 28 Cabinet Ministers and 40 State Ministers covering various subjects, he said adding that the Treasury has to collaborate with all state entities to prepare estimates of revenue and expenditure.

The government will resort to domestic financing but refinancing external debt domestically would deplete reserves further, exerting more pressure on the exchange rate. Moreover, domestic debt generally comes at higher cost and shorter maturities than external debt.

However domestic borrowings will be made with far more due diligence, better project planning while considering variables such as debt maturity, currency disparity and etc, he disclosed.

Despite a decline in government revenue, the Ministry will maintain a simple tax structure with low rates in the 2021 budget as it is the most suitable way to revive economic activities, he pointed out.

Government revenue is forecasted to be around Rs.2.11 trillion amidst economic downturn from the coronavirus but the Treasury hopes revenue to pick up from the end of the first half of next year.

This anticipated revenue upsurge is to be driven by the anticipated uptick in consumption and investment activities from the 2021 budget taxation and revenue proposals, he revealed.

In a worse-case scenario, state revenue could decline to Rs. 1.8 or 1.4 trillion, which is also below the target of Rs. 2.1 trillion, provisional estimates revealed.

The estimated expenditure will shoot up to Rs.2.9 trillion due to relief measures to be announced for COVID- 19 affected sectors.

Public debt repayments have become the largest element of government spending and the amount keeps on increasing with US$1 billion in sovereign bonds to mature in 2021.