There have been only three instances since 1955 where the government has had a primary surplus (since revenue has covered all expenditure); two of those years are 2017 and 2018, Central Bank Governor Dr. Indrajith Coomaraswamy said.
Speaking at a CEO’s Forum organized by the National Chamber of Exporters of Sri Lanka last week, the governor said, the trade deficit from January to April in 2018 was USD 4 billion and the trade deficit from January to April 2019 has come down to USD 2.5 billion. “So there is a USD 1.5 billion adjustment in the trade account, which meant there’s less pressure on the exchange rate now. Essentially we are now managing the exchange rate without trying to intervene much.”
Last year there was a primary surplus of 0.6 of GDP. There seems to be structural improvement in the budget which needs to be sustained, he continued.
“With improvement in the trade account we now see a much better balance between inflow and outflow in the foreign exchange market; as a result the rupee has appreciated by 4.1% this year. This improvement in the trade balance has been due to the import compressor and export expansion,” he told a recent meeting with CEOs and export industry representatives.
Talking about the government budget he said, that is an area with quite a lot of pressure. “The revenue has been affected; custom duty has come down - partly because the imports have come down - and of course due to the interruptions that happened following the Easter Sunday attacks. The VAT has been affected and eventually income tax has also been affected following the disruptions activity over the past couple of months.”
What the government has done is to review the whole budget and is trying to meet the additional expenses related to security and relief payments, without disrupting the overall medium term budget framework that’s been laid out.
There may have to be some expenditure rephrasing particular on the capital expenditure side, “because we have very little room to manoeuvre in terms of adjusting recurrent expenditure. Recurrent expenditure is basically interest payments, salaries and social welfare payments. So there is very little room to manoeuvre. When we have to make an adjustment it has to be ‘carefully adjusted’. What we are trying now is to make those adjustments and keep the broad network intact,” the governor added.
Last year there was tremendous press on the trade account - which is why the currency came under pressure, Dr. Coomaraswamy explained adding that, ‘there pressures due to US interest movements, oil prices changes, trade sanctions and strengthening of the dollar, plus the fact that our trade account deteriorated significantly. There were three sources of pressure on our trade account – one was the rising oil prices. The second was the government’s decision to reduce taxes on gold imports. As a result, gold imports spiked very sharply. In 2017 the government reduced the gold import duty to zero in an attempt to promote the local industry. Actually what happened was gold was imported to Sri Lanka and was smuggled to India - as there is an insatiable appetite for gold in India. In fact the policy decision had no positive impact on the domestic production – but only created a sharp spike in gold imports. In April last year we equalized the duty with the Indian duty which helped bring down gold imports. Therefore the pressure is low now.”
Then the other source of pressure, says the governor, was from the motor vehicle imports. “In a society such as ours people want to own a motor vehicle. The government responded to those aspirations by reducing the duties particularly on small vehicles which put pressure on the rupee. We had to persuade the government to take a few measures including a mixture of duty adjustments as well as macro prudential measures such as import margins to take remedial actions. Now we have seen motor vehicle imports coming down.”
“We couldn’t have done it faster - it takes time to persuade the government. Now we have got there. That is being reflected in the performance in the trade account.”
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