Annual Report 2008 - Ministry of Finance and Planning

1. Macro Economic Perspectives
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Chart 1.2 Chart 1.3
The budgetary situation was managed in a absolutely
challenging environment with a lower than expected revenue
growth and more than expected expenditure overruns. The
slippages in revenue arose from tax concessions granted on
essential commodities to curtail domestic price increases,
a significant decline in motor vehicle imports partly due
to import restrictions introduced in the form of increased
margin requirements on Letters of Credit for non-essential
imports and the implementation of concessionary duty
scheme for public servants. Contraction in cigarette sales
and liquor production attributable to government policy and
the slowdown in the economic activities in the latter part
of the year, further hampered revenue flows. Despite these
developments, the Government revenue enhanced by Rs. 90
billion to Rs. 655 billion an increase of 16 percent. However,
the revenue as a percentage of GDP reduced to 14.9 percent
in 2008 from 15.8 percent in 2007.
Despite the pressures exerted due to high fertilizer prices,
salary and Cost of Living Allowance (COLA) increases to
public servants and pensioners, recruitments to strengthen
security forces in the newly liberated areas and the high
interest cost stemming from tight monetary policy, the
recurrent expenditure as a percentage of GDP declined to 16.9
percent in 2008 from 17.4 percent in 2007. However, this gain
was not reflected in the revenue account as revenue deficit
increased to 2 percent in 2008 from 1.6 percent in 2007.
Public investments were maintained at 6 percent given the
Government’s commitment in developing infrastructure
facilities with a view to support economic growth and
income generating activities in the lagging regions.
Another noteworthy achievement in the fiscal front was
maintaining the budget deficit at the same levels as 2007
despite revenue shortfalls, spillovers in certain recurrent
expenditures and channeling enhanced funds for public
investments. Anticipated foreign financing in the form of
capital market borrowings did not materialize in the wake
of the global financial turmoil. Therefore, Government had
to resort to domestic borrowings especially bank financing
thus reversing the net repayments to the banking sector
recorded in 2007. As there was a reduction in net foreign
financing, mainly caused by flight in short term capital and
increased amortization, there was increased recourse to
domestic financing. While this shift in financing mitigated
the exchange risk in deficit financing, it constrained the
growth of credit to the private sector, in the context of a tight
monetary policy. The Government debt to GDP ratio further
declined to 81 percent of GDP in 2008 from 85 percent in
2007.
Positive trends which Sri Lanka recorded with respect to
Balance of Payments (BoP) in the last three years continued
into the first nine months of 2008, reversed with the shrinking
of exports, pre-mature withdrawals of foreign investments
in Government securities and reduction in capital inflows.
The overall balance in the BoP recorded a deficit of US $
1,225 million by end 2008 in comparison to a surplus of US$
531 million in 2007.
Ministry of Finance and Planning Sri Lanka
Annual Report 2008