2010

ECON ASSIGNMENT
ADVANCE DIPLOMA IN BUSSINESS MANAGEMENT

ID:- 092104 9.2 BATCH 14/06/2010

QUESTION

Government budget defecit is not favorable for an economy like srilanka but spendings by government are again compulsory for the well being of society Critically discuss the above statement the above statement with special reference to Sri Lankan economy

First of all its necessary to say, That there can be several definitions of budget deficits such as the structural budget deficit, the inflation adjusted budget deficit, the nominal budget deficit, the primary budget deficit, the budget deficit on current account and the over-all budget deficit. Normally budget deficit is When real GDP (gross domestic product) less and when country couldnt bare own spending there are issues regarding grants from foreign countries, receipts from privatization which affect the computation of the budget deficit. When there is a deficit in the over-all budget then the deficit has to be covered by funding which means borrowing. We can borrow from the public; from the banks or from foreigners. Here we can borrow from the multilateral lending agencies like the World Bank or the ADB or bilaterally from other governments such as China, Japan or USA. The latter are foreign currency loans to be repaid in a designated foreign currency. The Ports Authority has taken a large amount of loans denominated in yen. Most of the multilateral lending is for projects and the Rupees have to be spent first before the World Bank or the ADB will reimburse the money Sri Lanka's real annual growth in GDP averaged 4% during the period under review (1996-03) despite domestic setbacks including civil hostilities and political uncertainty and substantial economic difficulties. Per capita GDP rose to US$872 in 2002 it 9% higher than in 1996. Nonetheless, poverty remains widespread especially in rural areas. Sri Lanka's UN development ranking has declined. The large public sector still has a dominant role in the economy and stateowned enterprises exist in many sectors. Sustained high growth will require major macroeconomic and structural reforms to control inflation and reduce high fiscal deficits and mounting public debt to improve economic efficiency and encourage private-sector-led growth. A more diversified economy would help strengthen the economy's resilience and performance

Economic Effects of a Budget Deficit

Increased borrowing

The government will have to borrow from

locally rates rise, crowding out Non-bank EPF/ETF Bank borrowings/Development Bonds Borrow abroad donors will give for projects Low interest deficit finance reforms and program loans (we have stopped reforms) Foreign commercial borrowing (china ,Japan,USA) Printing Central Bank credit

Higher debt interest payments

Selling bonds will increase the national debt .this has a high opportunity cost because it requires future generations to pay higher taxes.

Increased AD

A budget deficit implies lower taxes and increased G, this will increase AD and this may cause higher Real GDP and inflation.

Higher Taxes and lower spending

In the future the government may have to increase taxes or cut spending in order to reduce the deficit. This may cause reduced incentives to work

Increased Interest rates

If the government sells more bonds this is likely to cause interest rates to increase. This is because they will need to increase interest rates in order to attract investors to buy the extra debt. If government interest rates increase it will push up other interest rates as well.

Crowding Out

Increased government borrowing may cause a decrease in the size of the private sector

Inflation remains a key policy to concern A sharp increase on food and fuel prices in 2008 created hardships for large populations countries in South Asia. Inflation adversely affects the poor disproportionately. It is a serious problem for many countries in the sub region with high incidence of poverty. In Sri Lanka inflation is expected to rise in 2010 following a sharp deceleration in it in 2009. Therefore, controlling inflation will remain a major challenge for the Government. The country witnessed a faster reduction in inflation in 2009. Inflation after reaching a high of 28% on a year-on-year basis in June 2008 decelerated sharply to less than one per cent in September 2009. On average inflation in 2009 was 3.4% as compared to 22.6% in 2008 as a result of restrictive monetary policy efforts, favorable domestic supply conditions and significantly lower global commodity prices. Because of all those incidents budget deflect remains high.. Budget deficit remains high As for all other sub-regions of Asia and the Pacific, Governments in South Asia used expansionary fiscal and monetary policies to counter the negative fallout of the global slowdown and moderate the decline in growth. Of some concern is the continuation of high budget deficit in some countries, while in others fiscal deficits improved somewhat in 2009 as compared to 2008. Moving forward, it is important that governments in the sub-region prepare a clear roadmap of fiscal consolidation to be implemented at the earliest to contain growing public debt. Central banks also showed much more willingness to implement concurrently a range of monetary easing and liquidity enhancing measures including reduction in cash reserve ratio, statutory liquidity ratio and key policy rates in support of expansionary fiscal policies. Furthermore, inflationary pressures are growing.

Sri Lanka budget deficit hit 8.5-pct of GDP for 10-months

Sri Lanka's budget deficit has hit an estimated 8.5 percent of gross domestic product (GDP) in the first ten months of the year, despite a recovery in revenues as expenses grew at a faster pace, the latest data showed. Revenues from January to October grew 8.1 percent to 506.1 billion rupees, while expenditure rocketed at a much faster 27.1 percent driving the overall deficit to 416.3 billion rupees. The deficit is about 8.5 percent of the 4,900 billion rupee GDP estimated at the time a deal with the International Monetary Fund was signed in July. The overall deficit was expected to be 346 billion rupees for 2009, or about 7.0 percent of gross domestic product under the IMF deal. But the overall deficit had hit 416.4 billion rupees by October, exceeding the full year target.

The deficit in the current account of the budget, or the gap between revenue and recurrent expenditure overtook the full year target much earlier. It has now hit a record of 173.6 billion rupees or 3.5 percent of GDP. Up to September 2009, total revenues lagged behind that of the previous year, as the economy slowed and import taxes in particular slumped amid a collapse in international trade. Based on trends so far the budget is on track for an 11.3 percent of GDP deficit, though higher nominal growth in the economy and a faster pick up in revenues can moderate the number. The November numbers came after a long delay. An International Monetary Fund mission due this month however will look at December numbers. Under the IMF deal, Sri Lanka has to provide preliminary data for assessment six weeks after a test date.

The IMF deal sought to cut the deficit so that the private sector would not be crowded out by government domestic borrowing and the economy would not be de-stabilized by money printing. Up to October the government was able to borrow domestically without disrupting the domestic economy too much amid 'flight to treasuries' behavior among banks, but in the past few week, the central bank has started to monetize debt. In the first four months of 2010, the government is running a temporary budget, broadly extrapolating the 2009 budget, with parliamentary polls due on April 08.

So budget deficit makes

Persistent poverty Macroeconomic imbalances Fragile economic growth Inadequate economic infrastructure weak democratic institutions in society

But in the case of our economy we should spent on our new development, because suddenly end of the civil war in north so we should help innocent victims that have face that situation. And brave solders who have sacrificed lot of a thing, and we have face natural disaster Tsunami in 2008, and we spent on tsunami victims help them to built up usual life And reduce poverty of our urban areas for developing country under mahinda chintanaya and gama naguma, maga naguma. So spending also compulsory for well being of socity