State revenues rose 12.6 percent to 556 billion rupees in the seven months to July from a year earlier, but current expenses raced ahead by 19.4 percent to 695.3 billion rupees, nearly twice the annual budgeted rate of 10.1 percent, fiscal data released by the Central Bank shows.
The revenue deficit or the gap between total revenues and current expenditure expanded 57.8 percent from a year earlier to 139.3 billion rupees. The deficit in the current account of the budget was also sharply higher than the 75.3 billion rupees recorded in June.
State capital expenditure also rose 41.6 percent from a year earlier to 286.4 billion rupees, driving the overall budget deficit (with grants) up 46.5 percent to 425.7 billion rupees.
The overall deficit has almost reached the annual target of 468.9 billion rupees promised in the budget for 2012. The overall deficit without grants at 417.3 billion rupees is already 5.56 percent of estimated gross domestic product for 2012, against a target of 6.2 percent.
However both July and August also saw an increase in Treasury bill rates, indicating that economic stability and ordinary people were protected from deteriorating state finances.
The economy is de-stabilized (and the rupee falls and inflation rises hurting citizens) when the Central Bank accommodates periodic fiscal slippages by printing money and purchasing Treasury bills to manipulate gilt yields.
When interest rates rise in time with deteriorating state finances, the economy may slow as people's savings are used up in unproductive state current spending, instead of high yielding private investment, but the economy remains stable.
Sri Lanka's economic growth for 2012 has already been revised down to 6.8 percent from an earlier 7.2 percent.
In July, Sri Lanka also sold a billion rupee sovereign bond indicating that domestic payment areas, which may have kept spending down in previous months may have been settled with bond proceeds.
About half of the sovereign bond was available to cover ruler spending while the balance was retained to settle a maturing bond.
The finance ministry has said that it intended to keep the deficit at 6.2 percent of gross domestic product. If the trend up to July is continued however Sri Lanka stands to run a deficit of about 9.5 percent of GDP.
In September Treasuries yields fell, indicating that budget pressures may have eased again.