Rs. 450 b Govt. revenue shortfall likely: ICRA Lanka

• Unlikely revenue target could cause Rs. 150 b expenditure shrinkage 
• Deficit to rise to 10.8%, total debt to 99.3% of GDP 
• Warns reserves will dip to $ 3.7 b by end-2021, though Govt. likely to rollover $ 2 b debt
• Rupee to hit Rs. 200 in May, Nov. and Dec. 
• Growth to be only 3.6% this year, exports to struggle

The Government is likely to face a revenue shortfall of Rs. 450 billion this year, which could see expenditure trimmed by Rs. 140 billion, pushing the deficit to 10.8% and total debt stock to 99.3% of GDP, ICRA Lanka said in its latest report yesterday.  

Releasing there “Economy Highlights” report for 20/21 ICRA Lanka, which is a subsidiary of Moody’s Investment Services, said it projects growth to be around 3.6% in 2021 and hover around 4% for next four years thereafter. This is significantly lower than the 5.5-6% predicted by the Central Bank.  

“The budget estimate put forth by the GoSL hopes to spend about Rs. 3.5 trillion, while the revenue side is expected to be over Rs. 2 trillion. Given the fragile state of the economy and the revenue loss from import controls, we doubt that the government would be able to meet this revenue target. 

Hence, we project the revenue would fall short by about Rs. 450 billion from the envisaged level,” the report said.  

“The Government plans to spend about Rs. 1 trillion in capital expenditure (investments) in 2021. But we expect the government to scale these down to about Rs. 850 billion and as a result we expect the total expenditure to be Rs. 140 billion less than what is mentioned in the budget estimates.

According to our projections, the budget deficit would reach 10.8% of the GDP in 2021. Total stock of debt will exceed Rs. 16.3 trillion and is expected to reach 99.3% of the GDP.”

The report said policy rate changes by the Central Bank was unlikely and interest rates are expected to stabilise, with AWPR to fluctuate between 5.5-6% for the year. ICRA Lanka also said exports were not expected to normalise in 2021 and tourism will have to endure another tough year. 

“Restrictions will keep imports flat throughout 2021. But we believe it is likely that the government may ultimately be compelled to relax the restrictions, at least partially, in 4Q. Nevertheless, the import restrictions would increase the trade deficit to about 6.1% of the GDP while generating a current account surplus of about 0.5% of the GDP.” 

Rising commodity prices will also have a bearing on the trade balance. Increasing oil, and industrial and agricultural inputs will also likely inflate the import bill of the country more so than the value of exports (expected price increases of export commodities and finished goods are relatively mild), causing terms-of-trade to deteriorate further.

“It is very likely that the financial (capital) account continues to be restricted. Remittances are likely to remain flat for 2021. Net outflows from G-secs and equities would also remain low. In this context, fluctuations in the trade deficit are likely to be the main determinant of the exchange rate assuming all export proceeds are converted to rupees. We expect significant pressure to depreciate in May, November, and December months, on account of relatively weaker current account balances. During these months the exchange rate may depreciate as low as 200 LKR/USD, but the in other months the rate in general may hover around 195 LKR/USD.”

ICRA Lanka expects the Government to rollover about $ 2 billion existing obligations, borrow about $ 2.3 billion of which $ 2 billion may come from a bilateral arrangement with China. In addition, FDIs may remain low around $ 200 million. As per ICRA Lanka’s projections, with the positive current account balance and additional forex borrowings total reserves would fall to $ 3.7 billion by the end of 2021.