Budgetary deficit warranted during downturn – Prof Lakshman | Daily News

Budgetary deficit warranted during downturn – Prof Lakshman

Professor  W D Lakshman
Professor W D Lakshman

Central Bank Governor Prof. W D Lakshman noted that running a budgetary deficit was warranted given the economic downturn globally caused by the COVID-19 pandemic. He went on to state that given the export and remittance earnings of the country the servicing of debt would not be a concern.

Prof Lakshman said “running a deficit budget, even one as big as 10% of GDP, is not wrong as a sovereign state is not like a household in terms of managing incomes and expenditures. The sovereign has the right of currency issue to help it manage its deficit when it decides to run a deficit.”

“The case for deficit financing has come up strongly during this year everywhere in the world because there was no other way for governments to address the devastating effects of the COVID-19 pandemic.”

Prof Lakshman was speaking to the CA Sri Lanka Budget forum yesterday. Foreign debt is expected to be reduced to 35 percent of the total debt stock. He said, “Several countries including Japan, Singapore and the United States have debt levels far exceeding their GDP. This shows that even such high levels of debt could be sustainable when domestic debt is predominant in the debt portfolio.”

The governor dismissed fear-mongering on the state of the country’s finances. He said “The ratio of Government’s foreign non-concessional debt to GDP is around 23 per cent, and the remainder is either domestic debt which could be rolled over or long term foreign concessional financing. Annual foreign debt service payments as a percentage of export earnings and remittances are around 12 per cent in a normal year like 2018.”

Inflation is expected to remain at around 5 percent. The Central Bank has been able to collect US$ 500 million from the domestic market from May onwards. The Rs is expected to remain stable.

He said, “the rebound of merchandise exports, increasing remittances, recovery of construction activity, and also the performance of the stock market since May have been quite impressive, and with the containment of the second wave, we hope, these positive trends will continue in the period ahead.”

The government will seek efficiencies in expenditure management and increase public investment from 2.6 per cent of GDP in 2020 to 6.1 per cent in 2021.