{"id":247658,"date":"2026-06-09T22:21:55","date_gmt":"2026-06-09T16:51:55","guid":{"rendered":"https:\/\/www.colombotelegraph.com\/?p=247658"},"modified":"2026-06-22T00:28:05","modified_gmt":"2026-06-21T18:58:05","slug":"budget-records-a-surplus-will-it-prevail","status":"publish","type":"post","link":"https:\/\/www.colombotelegraph.com\/index.php\/budget-records-a-surplus-will-it-prevail\/","title":{"rendered":"Budget Records A Surplus; Will It Prevail?"},"content":{"rendered":"

By\u00a0Hema Senanayake<\/a>\u00a0\u2013<\/strong><\/p>\n

\"\"

Dr. Hema Senanayake<\/p><\/div>\n

The government budget recorded an overall surplus in the first quarter of 2026. This is a record because it happened after about seven decades. Sri Lanka has not recorded an overall budget surplus since 1955. According to the provisional data, the government\u2019s overall budget surplus is Rs. 116.35 billion. (See Table 1.0 below.)<\/p>\n

But, unfortunately, in the second quarter of 2026, the currency is under pressure to depreciate, having significant exchange rate volatility. If the currency depreciates, budget surpluses will not sustain.<\/p>\n

Good news and bad news together, where positive and negative developments occur at the same time. How do we understand this dilemma? Can we find remedial measures to sustain a strong fiscal situation while bringing exchange rate volatility under control?\"\"<\/p>\n

If the budget surplus is recorded from increased tax revenues and other non-tax revenues such as fees on services, licensing fees, rents, SOEs\u2019 profit transfers, etc., excluding import tariffs, then that is good. If import tariffs contribute to a significant revenue increase, then the pressure on the currency could be understood. This means that certain revenue policies that solve the budget deficit problem might have created another in the monetary sector that badly affects external accounts.<\/p>\n

If the pressure on the currency continues, the budget surplus achieved will not prevail. To understand this point, let us look at one of the major external accounts, which is the national current account. In the past few years, from 2023, the current account posted a positive balance. From Q1 2025, the current account surplus declined until the end of the first quarter of 2026. We had a small surplus in the first quarter of 2026. However, in the second quarter, the current account is beginning to record a small deficit. If the said small or any deficit in the current account is offset by dollar inflows (foreign currency inflows) posted in the capital and financial account, especially through non-credit-based sources, we can still target higher economic growth.<\/p>\n

In theory, when the capital and financial account surpluses exactly offset the current account deficit, the overall Balance-of-Payment (BoP) remains in equilibrium. In that situation, there is generally no immediate pressure on the domestic currency to depreciate because significant foreign currency is flowing into the country to meet the excess demand for foreign exchange. If the currency is under pressure to depreciate and is truly depreciating, that implies that the above-mentioned balancing act is not taking place.<\/p>\n

All these mean, that everything in economic progress depends on external accounts and BoP, not on budget surpluses. The BoP records all transactions between a country and the rest of the world. It determines whether the country is earning\/receiving enough foreign exchange to pay for essential imports, service external debt, and to ensure the stability of the domestic currency.<\/p>\n

Geopolitical developments can certainly affect exchange-rate volatility. But it is not true that geopolitical developments solely contributed to the recent exchange rate volatility. In Sri Lanka\u2019s recent situation, the depreciation pressure on the rupee appears to be more closely linked to domestic factors, particularly a rapid increase in private credit growth associated with the surge in vehicle imports.<\/p>\n

In a cause-and-effect paradigm, the transmission mechanism is straightforward. Private credit expands rapidly as financial institutions finance vehicle purchases, so vehicle imports increase significantly. Importers require more foreign exchange to pay overseas suppliers. As a result, demand for foreign currency rises relative to the supply. The outcome is that the rupee comes under depreciation pressure. This has happened previously too when Mr. Ravi Karunanayake was the Minister of Finance. As Sri Lanka has been recovering from a major external debt crisis, the monetary authorities and the government should have been more careful. Unwarranted private credit expansion should have been avoided.<\/p>\n

In a small open economy like Sri Lanka, large import-driven credit expansions can quickly affect the BoP and the foreign exchange market, especially when the imports have a high foreign-exchange content and are unable to add value and, in turn, bring in foreign currency inflows, as is the case with motor vehicles.<\/p>\n

Economic growth requires foreign exchange to import fuel, raw materials, machinery and technology and to repay external debt while ensuring a stable exchange rate to encourage both domestic and foreign investments.<\/p>\n

If the BoP is weak, growth becomes difficult regardless of the government\u2019s fiscal position.<\/p>\n","protected":false},"excerpt":{"rendered":"

[…]<\/p>\n","protected":false},"author":106,"featured_media":242830,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[3,2186,46,8,2375],"tags":[],"class_list":["post-247658","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-colombotelegraph","category-featured-news","category-constitutional-reforms","category-editorial","category-stories"],"yoast_head":"\nBudget Records A Surplus; Will It Prevail? - Colombo Telegraph<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.colombotelegraph.com\/index.php\/budget-records-a-surplus-will-it-prevail\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Budget Records A Surplus; Will It Prevail? 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