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Sri Lanka fiscal deficit seen widening after bombings

ECONOMYNEXT – Sri Lanka’s fiscal deficit is expected to worsen in the coming months as the government gives tax breaks to businesses in tourism to recover after Easter Sunday’s suicide bombings which killed over 250 people, economists and analysts said.

"We anticipate that the fiscal impact would come from the revenue side as the government may not actively push on increasing revenues this year, given the dampened consumer and business sentiment – even though revenue has been a higher priority in recent years," said an analyst at Research Frontier.

The attacks and resulting uncertainty and security measures are expected to slow consumer spending and investment.

Sri Lanka has cut value added tax (VAT) on tourism to 5 percent from 15 percent until March next year.

"The tourism industry, which was one of the main growth sectors identified for 2019, and related businesses, even in the food and beverage industry will see a significant impact as a result of the attacks," said the analyst at Frontier Research.

Last year, Sri Lanka had earned 18 billion rupees from value added tax on tourism.

"Not only will the plunge in tourists curtail demand for local goods and services, but domestic consumers too are apt to postpone their consumption. At the same time, costs for businesses are set to rise, as the economic cost of new security measures gets imputed,” Dushni Weerakoon, Executive Director of the Institute of Policy Studies, wrote in an assessment of the impact of the attacks.

“Aside from direct costs, the indirect costs arising from a loss of consumer and business confidence can never be measured accurately," she said.

"There is already a relatively high allocation to defense expenditure (about 300 billion rupees),” said the analyst at Frontier Research.

“They could however increase spending to support the tourism recovery later on in the year – such as increased spending on international tourism promotion.”

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Weerakoon has said Sri Lanka’s fiscal financing needs can be expected to widen from the adverse impacts on the economy of the terror attacks, further escalating domestic financing of the deficit from the already high 4 percent of GDP announced in the budget.

“Together, these trends can destabilise macroeconomic stability without producing much by way of sustained growth," she said.
(COLOMBO 9 May 2019-SB)

 

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