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Sri Lanka targets 5.5-pct deficit, up to 4.5-pct GDP growth in 2020: FinMin

ECONOMYNEXT – Sri Lanka is targeting 5.5 percent of gross domestic product deficit for 2020, with expenditure cuts, slower capital spending and adjustments to recoup losses from a value-added tax cut and growth of up to 4.5 percent of GDP which will boost revenues, the Finance Ministry said.

The Finance Ministry said the tax loss calculated by Fitch Ratings, which downgraded the outlook on Sri Lanka’s ‘B’ rating to negative from stable on Thursday, were over-estimated and a deficit of 6.5 percent was too high.

“Taking all into consideration, the best estimate of the budget deficit would be around 5.5 percent of GDP in 2020, as against the Fitch’s projection of 6.5 percent of GDP,” the Finance Ministry said.

Sri Lanka is expecting to present a budget in June 2020, indicating another vote on account was likely soon after the general election, which is due in April.

In 2020, Sri Lanka was targeting a 5.3 percent deficit according to a revised deal with the International Monetary Fund.

Sri Lanka cut valued-added tax (VAT) from 15 to 8 percent, lifted a 2 percent cascading national building tax for domestic transactions while consolidating tax for imports with an existing 7.5 percent cess called the Ports and Airports Levy (PAL).

Not one-to-one

Sri Lanka said the tax losses were not as large as estimated by Fitch Ratings. Earlier Treasury Secretary Sajith Attygalle has also said that tax losses would not be one-to-one.

The Finance Ministry said a 15 percent value-added tax came from a so-called ‘financial VAT’ charged on banks and financial institutions, which would remain unchanged.

Another 10 percent came from cigarette and alcohol. An excise tax had already been raised to recoup the tax loss.

By the two measures, 25 percent of the value-added tax had been recovered.

With the NBT on imports being added to PAL taken up to 10 percent, there would be no revenue loss from that tax on imports.

There would also be a saving on VAT on state expenses allocated in the existing budget.

Any VAT saved at state enterprises (which do not reduce retail prices) will also come back as non-tax revenues, the Finance Ministry said.

The Finance Ministry has given orders to cut expenditure by 0.6 percent of GDP and there would be a slowdown in capital expenditure.

“At the same time, the presentation of the government budget for 2020 somewhere in June 2020 would allow hardly adequate time to expend on large projects in 2020 due to procedural requirements, thereby resulting in a significant expenditure rationalization in 2020,” the Finance Ministry said.

Higher Growth

Sri Lanka is expected to grow 4.0-4.5 percent in 2020, which would also boost revenues, the Finance Ministry said. Under an IMF program the revised growth target was 3.5 percent for 2020.

“The switching of resources from unproductive public expenditure to the private firms and individuals will be growth friendly in a context where there has been a persistent output gap,” the Finance Ministry said.

“Higher growth will have a positive impact on the overall debt dynamics of the country as well.

Though pay-as-you-earn (PAYE) tax has been removed it has been replaced by income tax at a higher threshold.

Overall Policy Measures

Witholding tax was not a final tax and will come from income tax at the end of the year.

“In the circumstances, we strongly believe that it is highly untimely for rating agencies to speculate negatively over the performance of the Sri Lankan economy and its outlook without appropriately analysing the effects of all the policy measures introduced by the newly formed government which has been in office merely for one month,” the Finance Ministry said.

“In particular, we emphasize that due consideration should be given to the imminent economic boost as a result of the tax reforms introduced by the Government that would rejuvenate the private sector towards a higher growth trajectory in an economy that has been stagnating for a considerable time, despite the prevalence of sound macro-economic fundamentals.

“Such a boost in the economy will eventually strengthen the fiscal outlook of the government in medium to long-term through increased revenue flows.”

Sri Lanka is also experiencing higher inflation as the economy recovers. Analysts have warned earlier that the effects of the currency collapse in 2018, would see higher prices as the credit system recovered, which would boost nominal revenues.

In the third quarter the GDP deflator, a broad measure of inflation had already risen to 6.2 percent from 0.6 percent in the first quarter.

Sri Lanka was also committed to repaying debt, on which the country had an unblemished record, the statement said.

“It is noted that the Government attaches the highest priority to meeting debt service obligations in order to preserve Sri Lanka’s unblemished track record of duly servicing of government debt,” the Finance Ministry said.

Sri Lanka would also continue to engage with the International Monetary Fund and is confident of meeting target for 2019.

“Further, it is important to stress that the Government will continue its engagement with multi-lateral lending agencies,” the statement said.
“The current IMF programme will have its final review by February 2020 and the authorities are certain that the performance targets for 2019 will be duly met.”

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(Colombo/Dec20/2020 – Update IV)

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