ECONOMYNEXT – Sri Lanka will breach the primary spending limit of 13 percent of gross domestic product on 2026 cyclone relief but will maintain the targets in an International Monetary Fund debt sustainability plan, Deputy Minister of Finance and Planning Anil Jayantha Fernando said.
Approval is being sought from the parliament to spend 500 billion rupees extra in 2026.
The supplementary estimate involves around 1.4 percent of GDP in extra spending breaching the 13 percent of GDP primary spending limit, with the total spending likely to reach 7,657 billion rupees, Minister Fernando said.
“We are exceeding the target because it is an emergency,” Minister Fernando said.
“Sri Lanka will maintain the 95 percent debt target by 2032.”
Sri Lanka will continue to service foreign debt, he said. There was no truth in the narrative that foreign debt is only being repaid from 2028, he said.
“We are servicing foreign debt even now,” he said. “There are some payments on re-structured sovereign bonds due in 2018. But we are servicing debt every year.”
The 95 percent debt to GDP to target is one of the limits set in a debt sustainability analysis.
With the central bank generating less inflation than its controversial 5 percent floor to raise cost of living of the people and maintaining a stronger rupee, despite recent concerns over depreciation to 310 rupees to the US dollar, Sri Lanka has so far exceeded IMF debt targets.
Since depreciation became a problem only in the 1930s, budget deficits do not take into account the explosion of foreign debt from monetary debasement.
A result macro-economists can escape initial parliamentary scrutiny for debasing money, though the national debt goes up in domestic money, and politicians are later held accountable when things go wrong eventually, analysts say.
Before macro-economists started the age-of-inflation, after inventing open market operations in the 1920s, accounting in general was based on historical cost principles and cash based budgeting was the norm for governments, analysts say.
Low or no inflation gives more real money for people to spend, buying more goods, generating more tax revenues, unlike in higher inflation situations, where spending power is eroded steadily reducing real spending, reducing the goods that can be bought.
Taxes also lose their spending power, requiring more money to do the same activity.
Lower inflation keeps spending stable for specific activities over the years.
Under revenue based fiscal consolidation, an unusual spendthrift doctrine which rejects classical economic principles of combining spending-based consolidation to bring budgets in line, there is no restraint on spending.
Revenue-based fiscal consolidation which implies no spending restraint may be a result of the stimulus mania that gripped Western macro-economists after the housing bubble burst and has now devastated budgets of many developed nations.
The 13 percent primary spending limit is the only real restraint the people and tax payers, have to keep under control macro-economists who believe that greater government spending will bring ‘growth’
The current administration is under pressure from macro-economists outside government to boost capital spending, for stimulus or heedless spending.
However, according to classical economic principles capital spend must be deployed to fill identified critical infrastructure gaps which will bring returns year after year, and not as a tool to boost short term growth by heedless spending for momentary stimulus.
The 13 percent restraint is important, as otherwise all governments will tend spend any tax revenues they get as Cyril Northcote Parkinson explained in his Second Law, elaborated while he was teaching what is now called the National University of Singapore, based on an original article he wrote for the Economist magazine in 1955.
“This is a matter of everyday expense,” Parkinson explained. “On the day we receive an increase in salary, the more inexperienced among us will plan how the money is to be spent… Those with more experience in life will save themselves the trouble.
“There is no surplus. There never has been. There never will be. Additional earnings cannot be allocated because they are quietly absorbed. We are no wealthier at the end of the month. We may actually be poorer. That surplus may exist in theory; it never exists in fact.
“When we turn from private income to public revenue we find that the basic principle applies; but here there is a difference. For, while the amount of the individual’s income is limited and is known, the amount of the Government’s income is elastic and vague.”
The government can tax and it can borrow until default and it can also print money. (Colombo/Dec17/2025)
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