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In his brilliant account of our current economic situation, delivered at the Liberal Party discussion on Economic Reform, Indrajith Coomaraswamy spent some time in discussing the budget deficit, and why it is particularly worrying in the current context.

He noted that the current account of the balance of payments has been in deficit since 1957, while the current account of the budget has been in deficit since 1987. He made it clear that it is not a new phenomenon that government has been borrowing to meet some of its recurrent expenditure and all of its capital expenditure over the last 25 years. But he also noted why Sri Lanka needs now to be even more worried than before about living beyond its means.

A budget deficit is a principal source of instability in the system. High budget deficits lead to inflation by creating excess demand. The inflation differentials between Sri Lanka and its competitors and trading partners that result exert pressure on the exchange rate. But, given the high import component in our basic consumption bundle, it is politically difficult to maintain a flexible exchange rate policy.

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Rajiva Wijesinha

November 2019
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