Sri Lanka hikes Treasury guarantees to 15-pct of GDP

ECONOMYNEXT – Sri Lanka is hiking Treasury guarantees to 15 percent of gross domestic product, or about 330 percent of the original limit set by a fiscal responsibility law in 2003, which sought to limit fiscal profligacy and make it more difficult to understate and hide budget deficits.

A Treasury guarantee allows the government to guarantee a loan from a bank or other lender to a state corporation or private entity without passing the cash through the budget as a direct allocation in capital or current expenditure.

Prime Minister and Finance Minister Mahinda Rajapaksa told parliament in prepared remarks that the Treasury guarantee limit would be raised to 15 percent of GDP and another 180 billion rupees would be added to the borrowing limit for 2020, in a delayed presentation of a budget for the year.

Sri Lanka is now under a Coronavirus crises. Sri Lanka’s central bank has guaranteed some loans to private borrowers amid a Coronavirus crises in 2020, to reduce the risk to depositors of banks and the erosion of their capital.

Ultimately however any losses would be off-set against its capital and profits if any.

In theory a Treasury guarantee is a contingent liability which will fall on the government only if the ultimate borrower is unable to repay it.

In practice guarantees have been given to agencies like the Road Development Authority, to build roads on which there are no fees charged and here is no doubt that they have to be repaid out of budget allocations.

Guarantees have also been given to state enterprises on which there are going concern cautions by auditors, instead of making a direct budget allocation.

The original 2003 law set a limit of 4.5 percent of GDP for Treasury guarantees for a year and a 65 percent of GDP national debt by 2013 and deficit of 5 percent.

In 2020 Sri Lanka’s deficit in 2020 is expected to be around 10 percent of GDP and central government debt over 90 percent.

Analyts say the fiscal responsibility law, which has been amended repeatedly to permit greater fiscal profligacy, was part of a set of strategies similar to those adopted by then Malaysia Finance Minister Tun Daim Zainuddeen in 1984/85, backed by monetary stability.

In 1987, 1988 and 1989 he repaid Malaysian foreign debt ahead of schedule.

In 2016, Sri Lanka’s Socialist-Keynesian Sirisena-Wickremesinghe administration, which taxed private citizens to give higher salaries to state workers, followed unusually severe monetary instability by targeting a real effective exchange and a perceived output gap and set up a new price control agency, raised the limit to 10 percent in 2016.

By that time the Treasury guarantee limit was already raised to 7 percent.

The law also intended to reduce regime uncertainty from frequent changes in tax rates by mandating the “adoption of policies relating to spending and taxing, as are consistent with a reasonable degree of stability
and predictability in the level of tax rates in the future.”

Regime uncertainty discourages domestic and foreign investment and as result, kills growth and future jobs.

Sri Lanka is currently in a fiscal crisis after taxes were cut in December 2019 without going to the parliament and Coronavirus crises, worsened output.

Sri Lanka also has a midnight tax gazette, where taxes are literally slammed while the population is sleeping.

The original Section 03 of the Fiscal Management (Responsibility) Act, No. 3 of 2003 is reproduced below:

3. The objectives underlying responsible fiscal management which need to be adhered to, by the Government
in outlining the fiscal strategy of the government are as follows :—

(a) reduction of government debt to prudent levels, by ensuring that the budget deficit at the end of the year 2006, shall not exceed five per centum of the estimated gross domestic product and to ensure that such levels be maintained thereafter ;

(b) prudent management of the financial…