fiscal policy monetary policy balance of payment and

AL Seminar Fiscal Policy Monetary Policy Balance of Payment and Double Entry Book Keeping

By

Dr. Nandasiri Keembiyahetti

6/24/2021 1

Fiscal policy

Fiscal policy refers to the use of government spending and tax policies to influence aggregate demand for goods and services, in order to achieve macroeconomic goals related to nations output, employment, inflation, and economic growth.

• Fiscal policy is largely based on ideas from John Maynard Keynes, who argued governments could stabilize the business cycle and regulate economic output.

• During a recession, the government may employ expansionary fiscal policy by lowering tax rates to increase aggregate demand and fuel economic growth.

• In the face of mounting inflation and other expansionary symptoms, a government may pursue contractionary fiscal policy.

6/24/2021 2

Government Revenue

6/24/2021 3

6/24/2021 4

6/24/2021 5

6/24/2021 6

Reasons for declining revenue

• Subdued economic performance due to the COVID-19 pandemic

• the tax revisions implemented from late 2019, and the tax concessions granted to businesses and individuals affected by the pandemic

• Non-tax revenue declined marginally by 2.9 per cent to Rs. 151.4 billion, reflecting the reduction in revenue collection from fees and charges and profit transfers of SOBEs

6/24/2021 7

• Tax revenue declined by 29.9 per cent to Rs. 1,216.5 billion in 2020 from Rs. 1,734.9 billion in 2019, mainly due to low revenue from income tax, VAT, NBT, CESS and excise duties.

• The decline in income tax revenue was mainly attributable to the abolition of PAYE tax and ESC, along with the revisions to WHT and corporate and non corporate income tax with effect from January 2020.

• Revenue from VAT and excise duties declined amidst the slowdown in economic activity and the reduction of the VAT rate from 15 per cent to 8 per cent effective from 01 December 2019.

• Revenue collection from excise duty on motor vehicles declined to Rs. 48.8 billion in 2020 from Rs. 130.4 billion in 2019, due to the contraction of motor vehicle imports amidst the restrictions imposed to curtail non-essential imports during 2020.

6/24/2021 8

6/24/2021 9

Summary of Government Expenditure Item 2019 / 2020

6/24/2021 10

Government expenditure

• Government expenditure and net lending in 2020 declined to 20.3 per cent of GDP (Rs. 3,041.0 billion), from 22.2 per cent of GDP (Rs. 3,337.9 billion) in 2019.

• The decline in government expenditure and net lending was attributed to the notable reduction in capital expenditure and net lending to 3.3 per cent of GDP (Rs. 492.6 billion) in 2020 from 6.1 per cent of GDP (Rs. 913.3 billion) in 2019

• The recurrent expenditure increased to 17.0 per cent of GDP (Rs. 2,548.4 billion), compared to 16.1 per cent (Rs. 2,424.6 billion) in 2019.

• The increase in recurrent expenditure in 2020 was mainly due to the rise in expenditure on subsidies and transfers, salaries and wages and interest payments.

6/24/2021 11

Interest Payments

• The expenditure on interest payments, which accounted for the largest share of recurrent expenditure accounted for 38.5 per cent of the total recurrent expenditure, and was equivalent to 71.7 per cent of the government revenue in 2020

• Interest payments on outstanding domestic debt accounted for 72.8 per cent of total interest payments, increased to Rs. 713.6 billion in 2020, from Rs. 667.4 billion in 2019, mainly due to the increased net domestic financing

• Interest payments on foreign debt increased by 14.0 per cent to Rs. 266.7 billion in 2020 from Rs. 234.0 billion in 2019, mainly reflecting the impact of increased interest payments on outstanding commercial debt.

6/24/2021 12

Budget Deficit

6/24/2021 13

6/24/2021 14

6/24/2021 15

Domestic debt

• Outstanding domestic debt of the central government increased to 60.6 per cent of GDP at end 2020 from 45.5 per cent of GDP in 2019, primarily reflecting the impact of increased domestic financing.

• In nominal terms, domestic debt increased significantly by 32.7 per cent to Rs. 9,065.1 billion at end 2020 from Rs. 6,830.3 billion at end 2019.

• Of the total domestic debt, the share of short term debt increased to 24.2 per cent at end 2020 from 18.6 per cent at end 2019 mainly due to the increase in the outstanding stock of Treasury bills. The outstanding stock of Treasury bills increased by 85.4 per cent to Rs. 1,620.7 billion by end 2020, from Rs. 873.9 billion by end 2019.

• The outstanding balance of Treasury bonds continued to dominate the domestic debt portfolio, accounting for a share of 63.0 per cent (Rs. 5,713.3 billion) at end 2020 in comparison to 67.4 per cent (Rs. 4,606.2 billion) at end 2019.

6/24/2021 16

• The outstanding stock of Sri Lanka Development Bonds (SLDBs) declined to Rs. 486.9 billion at end 2020 from Rs. 559.3 billion at end 2019, while the outstanding balance of debt from Offshore Banking Units (OBUs) increased to Rs. 227.4 billon at end 2020, compared to Rs. 168.0 billion at end 2019.

• As at end 2020, the outstanding debt from the banking sector, which accounted for 52.2 per cent of domestic debt, increased substantially by 64.0 per cent to Rs. 4,735.7 billion, compared to Rs. 2,888.5 billion at end 2019, reflecting a significant increase in the outstanding debt held by the Central Bank and commercial banks.

• Domestic debt held by the non bank sector increased by 9.8 per cent to Rs. 4,329.3 billion from Rs. 3,941.8 billion at end 2019, accounting for 47. 8 per cent of domestic debt.

• Foreign currency denominated domestic debt declined to Rs. 719.3 billion (US dollars 3,858.6 million) at end 2020 from Rs. 728.2 billion (US dollars 4,009.4 million) at end 2019, owing to the settlement of Sri Lanka Development Bonds (SLDBs).

6/24/2021 17

6/24/2021 18

External Debt

6/24/2021 19

External debt stock declined in 2020 mainly due to

• repayment of the ISB of USD 1 bn that matured in October 2020

• reduction in outstanding foreign loans obtained by the Government

• decline in the non-resident holding of rupee denominated government securities

• the increase in the resident holdings of Sri Lanka's outstanding ISBs

• significant decline in market prices of Sri Lanka’s outstanding ISBs

Despite the challenges in mobilizing external financing, Sri Lanka continued to maintain its unblemished record of debt servicing.

6/24/2021 20

6/24/2021 21

6/24/2021 22

Central Government Debt as % of GDP

6/24/2021 23

Monetary Policy

• Monetary policy consists of the management of money supply and interest rates, aimed at meeting macroeconomic objectives such as controlling inflation, consumption, growth, and liquidity.

• This is achieved by actions such as modifying the interest rate, buying or selling government bonds, regulating foreign exchange (forex) rates, and changing the required reserve ratio.

6/24/2021 24

Policy Rates of Central Bank as at 2021-06-25

Standing Deposit Facility

Rate (SDFR) 4.50

Standing Lending Facility

Rate (SLFR) 5.50

Bank Rate 8.50

Statutory Reserve Ratio

(SRR) 2.00

6/24/2021 25

Recent Monetary Policy Measures Date Measure

19 Feb 2016 SDFR and SLFR increased by 50 basis points to 6.50% and 8.00%, respectively

28 Jul 2016 SDFR and SLFR increased by 50 basis points to 7.00% and 8.50%, respectively.

24 Mar 2017 SDFR and SLFR increased by 25 basis points to 7.25% and 8.75%, respectively.

04 Apr 2018 SLFR reduced by 25 basis points to 8.50%. Accordingly, the width of the SRC narrowed to 125 basis points from 150 basis points.

14 Nov 2018 SLFR reduced by 25 basis points to 8.50%. Accordingly, the width of the SRC narrowed to 125 basis points from 150 basis points. 14 Nov 2018 SRR reduced by 1.50 percentage points to 6.00% to be effective from the reserve period commencing 16 Nov 2018. SDFR increased by 75 basis points to 8.00% and SLFR increased by 50 basis points to 9.00%. Accordingly, the width of the SRC narrowed to 100 basis points from 125 basis points.

6/24/2021 26

22 Feb 2019 SRR reduced by 1.00 percentage point to 5.00% to be effective from the reserve period commencing 01 Mar 2019.

31 May 2019 SDFR and SLFR reduced by 50 basis points to 7.50% and 8.50%, respectively.

23 Aug 2019 SDFR and SLFR reduced by 50 basis points to 7.00% and 8.00%, respectively.

30 Jan 2020 SDFR and SLFR reduced by 50 basis points to 6.50% and 7.50%, respectively.

17 Mar 2020 SDFR and SLFR reduced by 25 basis points to 6.25% and 7.25%, respectively.

17 Mar 2020 SRR reduced by 1.00 percentage point to 4.00% to be effective from the reserve period commencing 16 Mar 2020..

27 Mar 2020 Introduced a concessional loan scheme, the Saubagya COVID-19 Renaissance Facility (Phase I - Refinance Scheme), up to a cumulative value of Rs. 50 billion at an interest rate of 4.00% to support the businesses affected by COVID-19.

6/24/2021 27

03 Apr 2020 SDFR and SLFR reduced by 25 basis points to 6.00% and 7.00%, respectively, to be effective from the close of business on 03 Apr 2020.

16 Apr 2020 Bank Rate reduced by 500 basis points to 10.00% and allowed to automatically adjust in line with SLFR, with a margin of +300 basis points

06 May 2020 SDFR and SLFR reduced by 50 basis points to 5.50% and 6.50%, respectively, to be effective from the close of business on 06 May 2020. Bank Rate automatically reduced to 9.50%.

16 Jun 2020 SRR reduced by 2.00 percentage points to 2.00% to be effective from the reserve period commencing 16 Jun 2020

16 Jun 2020 Extended the concessional loan scheme introduced on 27 Mar 2020 up to Rs. 150 billion at an interest rate of 4.00% to support the businesses affected by COVID-19 (the Saubagya COVID-19 Renaissance Facility - Phase II).

09 Jul 2020 SDFR and SLFR reduced by 100 basis points to 4.50% and 5.50%, respectively. Bank Rate automatically reduced to 8.50%.

6/24/2021 28

6/24/2021 29

Developments in Monetary Aggregates

6/24/2021 30

6/24/2021 31

6/24/2021 32

6/24/2021 33

6/24/2021 34

Balance of Payment

Current and Capital Account

Current Account

Trade Account

Goods

Services

Primary Income

Secondary Income

Capital Account

Gross acquisitions (Dr) / Disposals (Cr)

Capital Transfers

Financial Account

Direct Investments

Portfolio Investments

Financial Derivatives

Other Investments

Reserve Assets

6/24/2021 35

Goods

General merchandise on a BOP basis

Non-monetary gold

Services

Manufacturing services

Maintenance and repair services n.i.e

Transport

Sea Transport

Passenger

Freight

Air transport

Passenger

Freight

Other modes of transport

Postal and courier services

Travel

Construction

Insurance and pension services

Financial services

Charges for the use of intellectual property

Telecommunication, computer and information services

Telecommunications services

Computer services

Other business services

Personal, cultural and recreational services

Government goods and services n.i.e

6/24/2021 36

Primary Income

Compensation of employees

Investment Income

Direct Investment

Dividends

Re-invested earnings

Interest

Portfolio Investment

Equity

Interest

short-term

long-term

Other Investment

Reserve assets

Other primary income

Secondary Income

General Government

Financial corporations, non financial corporations, households

Personal transfers

of which, worker's remittances

Other current tranfers 6/24/2021 37

Capital Account

Gross acquisitions (Dr) / Disposals (Cr)

Capital Transfers

General Governemnt

Financial corporations, non financial corporations, households

6/24/2021 38

Financial Account

(1) Direct Investments

Equity and investment fund shares

Equity other than reinvestment of earnings

Direct investor in direct investment enterprise

- BOI companies

- CSE companies (not registered with BOI)

- Other companies

Reinvestment of earnings

Debt Instruments

Direct investor in direct investment enterprise

- BOI companies

Shareholder Advance

Intra Company Borrowings

Debt Repayments


- Other companies 6/24/2021 39

(2) Portfolio Investments



Debt securities

Central Bank

Deposit taking corporations, other than the central bank

Short-term

Long-term

General Government

Short-term (Treasury Bills)

Long-term

Treasury Bonds

SLDBs

Sovereign Bonds

Maturities of non resident holdings

Secondary market transactions by non residents

Other Sectors

Long-term

(3) Financial Derivatives 6/24/2021 40

(4) Other investment Other equity Currency & deposits Central Bank Short term Long term Deposit taking corporations, other than the central bank Short-term Long-term General Government Other sectors Loans Central bank Credit and loans with the IMF Other short term Other long term Deposit taking corporations, expect the Central Bank Short term Long term General Government Short term Long term Other sectors Short term Long term Insuarance, pension and standardised guarantee schemes Trade credits and advances Deposit taking corporations, expect the Central Bank

Short term Other sectors Short term Other accounts receivable/payable Central bank Short term Deposit taking corporations, expect the Central Bank Short term

Special Drawing rights 6/24/2021 41

(5) Reserve assets

Monetary gold

Special drawing rights (SDR)

Reserve position in the IMF

Other reserve assets

Currency and deposits

Claims on monetary authorities

Claims on other entities

Securities

Debt securities

Short term

Long term


Financial derivatives

Other claims 6/24/2021 42

6/24/2021 43

6/24/2021 44

6/24/2021 45

6/24/2021 46

6/24/2021 47

6/24/2021 48

6/24/2021 49

Exporting Garments worth of USD 250 to USA Debit Credit

Current Account Trade Account (goods) 250

Financial account Other Investment Account – Currency and deposit

(250)

Importing Crude Oil worth of USD 500 from Iran Debit Credit

Current Account Trade Account (goods) (500)


500

Examples in Double entry book keeping

Example 1

Example 2

6/24/2021 50

Express Pearl Shipping company pays USD 400 to Sri Lanka for fire fighting

Debit Credit

Current Account Service Account 400


(400)

Sri Lankan traveller buys an Air ticket worth of USD25 from Singapore Airline and travels to Malaysia

Debit Credit

Current Account Service Account (25)


25

Example 4

Example 3

6/24/2021 51

Sri Lanka pays USD 800 being interest for foreign debt Debit Credit

Current Account Primary Income (800)


800

Sri Lanka pays USD 350 being loan installment of foreign debt Debit Credit

Financial account Other Investment Account – Loan General government

(350)


350

Example 5

Example 6

6/24/2021 52

Mr Gunasiri working in a Tile Factory in Kuwait sends USD 50 to his mother in Sri Lanka

Debit Credit

Current Account Secondary Income 50


(50)

Mr Gunasiri’s Son working in Kuwait Sri Lankan Embassy sends USD 50 to his mother in Sri Lanka

Debit Credit

Current Account Primary Income 50


(50)

Example 8

Example 7

6/24/2021 53

China Harbor company invest s USD 3000 in Fort City project Debit Credit

Financial Account Direct investment Account 3000

Financial Account Other Investment Account – Currency and deposit

(3000)

Gammanpila sells his stocks worth USD 450 in CSE to an Australian Citizen

Debit Credit

Financial Account Portfolio Investment Account 450

Financial Account Other Investment Account – Currency and deposit

(450)

Example 10

Example 9

6/24/2021 54

Mr Bazil, a Sri Lankan Citizen sells his house in USA for USD 6000 and bring the money to Sri Lanka

Debit Credit

Capital Account Gross Acquisition / Disposal 6000


(6000)

Mr Bazil, an American Citizen sells his house in USA for USD 6000 and buys Thomas De La Rue Company in Biyagama in Sri Lanka

Debit Credit

Financial Account Direct investment Account 6000


(6000)

Example 12

Example 11

6/24/2021 55

China donates 500,000 Sinopharm vaccine worth USD 5M to Sri Lanka

Debit Credit

Current Account Secondary Income 5 M


(5 M)

Sri Lanka purchases 500,000 Sinopharm vaccine worth USD 5M from China

Debit Credit

Current Account Trade- Goods (5 M)


5 M

Example 14

Example 13

6/24/2021 56

Sri Lanka buys Emirates Brand name for USD 5000 Mn Debit Credit

Capital Account Gross Acquisition / Disposal (5000 )


5000

Central bank sells Sri Lanka Sovereign Bonds worth USD 750 in foreign market

Debit Credit

Financial Account Portfolio investment debt securities 750


(750)

Example 16

Example 15

6/24/2021 57

6/24/2021 58

fiscal policy monetary policy balance of payment and

Documents