While some analysts say it was unethical for the Treasury to count grants "above the line" in order to reduce the 2009 budget deficit figure, the IMF says this is in keeping with international standards in accounting public finances. The Central Bank, which included grants with deficit financing in the past is expected to follow the Treasury’s format when reporting government finances in future.
The Pre-Election Budgetary Position Report published by the Ministry of Finance and Planning earlier this month recorded the budget deficit as 9.7 percent of GDP, far over the government’s own target of 7 percent of GDP which was incorporated into the IMF standby arrangement.
The 9.7 percent figure was arrived at because grants were counted as reducing the deficit, just as revenues do. The Island Financial Review’s lead story of March 08, 2010 showed that without grants the budget deficit would be even larger, at 10.22 percent of GDP.
The Central Bank had always included grants as part of deficit financing and it was not grouped alongside revenue and some analysts said the government was trying to create an illusion of sorts where the deficit would appear to be lower.
"Technically grants may be seen as revenues as they are not loans, but it is important not to group grants with revenue because then the true revenue and expenditure relationship cannot be seen clearly," an economist said.
However, an IMF official said it was in keeping with international standards that grants be shown "above the line."
"Calculating a deficit as ‘revenues plus grants minus expenditures’ is the internationally accepted standard. We never really agreed with how public financial accounting in Sri Lanka excluded grants from this calculation, Revenues and grants should be shown separately, but they should both be ‘above the line,’ and not considered as part of financing," IMF Resident Representative for Sri Lanka and Maldives Dr. Koshy Mathai told the Island Financial Review.
"The deficit measure is meant to show by how much the stock of debt is increasing. But grants, unlike loans, do not increase a country’s debt. It’s thus unfair to count grant-financed spending against the deficit but not to credit the grants themselves," Dr. Mathai said.
The Island Financial Review learned that the Central Bank would adjust its reporting format and would group revenue and grants alongside each other when the next annual report is released later this year.
However, the 9.7 percent of GDP budget deficit is still too high and the IMF has deferred the next tranche of the standby facility until the budget for 2010 is presented to parliament.
"Whether the deficit is 10.22 percent (without grants) or 9.7 percent of GDP should not be the issue," said an analyst. "Expenditure has overshot the government’s own target and this is a cause for concern. The government has to spend on development, maintain social welfare and rebuild the North and East, all this must be appreciated.
"But excessive or reckless spending could jeopardise its priority spending and long term sustainable could be at risk unless the government makes a genuine effort to curb its expenditure," the analyst said.
Dealers said government demand for credit is already putting pressure on interest rates, along with inflation expectations of the market.
Economists agree that Sri Lanka’s macro economy is sound for the moment with the only real threat coming from external factors and/or runaway budget deficits in the long term.
Source: The Island Online
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