ECONOMYNEXT – Sri Lanka’s tight fiscal policy with new tax hikes from December 1 will help the central bank to reduce inflation and interest rates faster than it has expected, the central bank governor Nandalal Weerasinghe said.
President Ranil Wickremesinghe, in his capacity as the finance minister, has raised personal income taxes, corporate taxes, and reintroduced withholding taxes on interest return among many other measures to raise the government revenue.
The move comes as the government is in discussion with the International Monetary Fund (IMF) for a $2.9 billion loan to move out of an unprecedented economic crisis it has faced. The island nation has already declared sovereign debt default in May this year.
Wickremesinghe has estimated to raise the tax revenue by 69 percent to 3.13 trillion rupees in 2023 to 10.3 percent of the gross domestic product (GDP) from this year’s estimated 7.8 percent.
“Tight fiscal policy in terms of bringing down the deficit is also supportive for monetary policy. This is what I said there is a conflict between fiscal policy and monetary policy as the fiscal policy was not tightened,” Governor Weerasinghe told reporters on Thursday (24) at a post-monetary policy media briefing.
“Loose fiscal monetary policy means there have been a lot more borrowings from the central bank and banking sector. That is expansionary monetary policy. As a result of tightening fiscal policy, that will certainly help the central bank to curtail inflation at a faster rate than what we basically envisaged.”
The government has planned to reduce the budget deficit to 7.9 percent of the GDP next year from this year’s 9.8 percent, budget data showed.
“If they continue to have this tight fiscal policy, that will reduce the demand for borrowing for the government. That will stabilize the interest rate and also inflation going forward.” (Colombo/Nov25/2022)