Sri Lanka’s Positive Cash Balance MaintainedSri Lanka’s Positive Cash Balance Maintained Sri Lanka’s Ministry of Finance maintained a positive cash balance of Rs542.3 billion at the end of April 2024, indicating a strong financial position. This balance was slightly lower than the Rs599.5 billion held at the end of December 2023. Financial Performance The Ministry of Finance reported that revenues surpassed expectations, reaching Rs 1,205.1 billion, while the outflow of funds amounted to Rs 1,420.5 billion, falling short of the target. Capital payments were marginally higher than anticipated. The cash deficit to be financed, amounting to Rs 403.4 billion, was also below the projected Rs 603.7 billion. Borrowing and Debt Repayments The deficit was financed through gross borrowings of Rs 796.5 billion, a decrease from the previous year’s Rs 959.9 billion. Debt repayments, however, exceeded expectations, reaching Rs 444.4 billion. Net borrowings totaled Rs 352.1 billion, lower than the anticipated Rs 690 billion. Cash Surplus In April, the government recorded a cash surplus of Rs 542.3 billion. This surplus typically aligns with the current account balance of state banks. In April 2023, Sri Lanka faced a small deficit of Rs 4.9 billion, which transformed into a significant surplus of Rs 599.5 billion by the end of 2023. Cautionary Notes Analysts warn that excessive cash balances financed through domestic lending can lead to relending and potential interest rate volatility in the interbank market. They emphasize the importance of managing government cash surpluses prudently to avoid economic disruptions. Historical Context Prior to the establishment of the central bank in 1950, Sri Lanka (then Ceylon) experienced high levels of inflation and currency depreciation caused by government overdrafts. Excess money was deposited in the currency board, triggering deflationary policies. Singapore’s current monetary framework, inspired by the currency board concept, absorbs surplus government funds and invests them overseas, creating a current account surplus. Conclusion Sri Lanka’s positive cash balance reflects a relatively healthy financial position. However, caution must be exercised to avoid excessive borrowing and ensure that surplus balances are managed responsibly to maintain economic stability.
ECONOMYNEXT – Sri Lanka’s Finance Ministry maintained a positive cash balance of Rs542.3 billion at the end of April 2024, down only slightly from Rs599.5 billion at the end of December, official data showed.
The Ministry of Finance received revenues of Rs 1,205.1 billion from taxes, levies and other revenues, 7.9 percent above the target, while the total outflow of funds was Rs 1,420.5 billion, which was less than expected and amounted to 93.5 percent of the target.
Capital payments were slightly higher than the target at Rs 188 billion.
The cash deficit to be financed amounted to Rs 403.4 billion, less than the planned Rs 603.7 billion.
The deficit was financed by Rs 796.5 billion in gross borrowings, down from Rs 959.9 billion a year ago, and debt repayments were Rs 444.4 billion, higher than expected.
Net borrowings amounted to Rs 352.1 billion, lower than the expected Rs 690 billion.
In April, the government had a cash surplus of Rs 542.3 billion.
This usually corresponds to the current account balance of state banks. At the end of April 2023, Sri Lanka had a small deficit of Rs 4.9 billion, which turned into a surplus of Rs 599.5 billion at the end of 2023.
Sri Lanka’s macro economists who used to run the Ministry of Finance used to have hundreds of billions of rupees in overdrafts with state banks, which were initially refinanced by the central bank’s standing facilities, leading in some cases to foreign exchange shortages and inflation.
Later they were converted into bonds and given to state banks. This practice does not cause new inflation.
However, analysts warn that running up excessively large cash balances through loans invested domestically often leads to relending to other borrowers and in the interbank market.
A sudden withdrawal of money lent in the interbank banking market has a knock-on effect on interest rates and can lead to reverse repo injections because a policy rate is in place. This is similar to the way swaps undermine monetary stability in a country with a policy rate.
Before inflation and currency depreciation were caused by macroeconomists after the central bank was established in 1950, Sri Lanka (then Ceylon) had excess money that was deposited in the currency board, which triggered a deflationary policy. Due to the absence of a policy rate, money deposited in the currency board was immediately converted into a foreign reserve.
Singapore still uses such a system to this day.
Not only the government’s cash surpluses, but also the surplus money from the Central Provident Fund is absorbed by the Monetary Authority of Singapore and invested as foreign currency in the sovereign wealth fund, creating a current account surplus.
The framework was developed by GIC architect Goh Keng Swee, who also founded Singapore’s Currency Board when the island seceded from Malaysia in 1967.
However, analysts say that knowledge of balances of payments and banknote issuance in general has been lost due to the doctrine taught at the so-called Cambridge-Saltwater universities from the 1920s onwards and deteriorated with the break-up of Bretton Woods in 1971 and the Second Amendment of the IMF in 1978. (Colombo/02 July 2024)
