Sri Lanka taxes, economy to pick up from 2020 2H, deficit 7.5-pct of GDP: Treasury Secy

ECONOMYNEXT – Sri Lanka’s state revenues will pick up in the second half of 2020, as tax cuts and lower interest rates expand disposable incomes, investment and economic activity, Treasury Secretary S R Attygalle has said.

“While there could be an initial decrease in on government incomes it is expected that incomes will pick up in especially for the second half of 2020,” Attygalle told member of Sri Lanka’s Exporters Association Wednesday night.

“Clearly there many ways of reviving economies but no economy has revived with high tax rates in times of trouble.

“In fact high tax rates get economies into trouble. Hence the tax reforms announced in December 2019 was aimed at simplifying the tax system increase the disposable income of tax payers and thereby stimulating growth.”

He said estimates of tax losses made by some were overblown because economies were dynamic and not static.

“I believe that there are people who believe ceteris paribus (all other conditions remaining the same) actually exists,” he quipped.

Rate cuts and falling interest rates will also help drive economic activity. Stronger growth will in turn help reduce bad loans at banks, he said.

This year the Maha rice harvest is also expected to be strong, which will help incomes of the rural economy.

In 2019, economic growth is expected to have fallen to 2.6 percent of gross domestic product by the International Monetary Fund, which is projecting a revival to 3.7 percent.

Deficit

Attygalle said the government had already undertaken “significant expenditure rationalization” no new office space had been rented, no vehicles bought. Cost cutting measures will be monitored during the year, he said.

In 2020 the overall budget deficit is expected to be around 7.5 percent of gross domestic product, he said.

The deficit will in part be driven by 200 billion rupees of unpaid bill and unaccounted expense from last year, which will be paid in 2020, he said.

“And when such bills are paid and accounted for in 2020 the budget deficit which was to be around 5 percent this year will now increase to almost 7.5 percent,” he said.

The IMF said tax cuts and arrears from 2019 could drive the deficit to 7.9 percent of GDP.

2019 revenues are estimated to be around 1,800 billion rupees, he said from an initial estimate of around 2,400 trillion.

The IMF revised down the revenue for 2019 to 1,975 billion rupees in a November review after a soft-peg of the rupee with the US dollar collapsed from 153 to 182 to the US dollar in 2018 amid liquidity injections.

Currency collapse and corrective measures lead to output shocks and revenue shortfalls and credit contracts.

State owned enterprises have been told to ‘clean up their act’ he said, with significant improvements in the quality of their board of directors, though not perfect.

Performance indicators and a code of conduct were being devised for SOEs. (Colombo/Feb13/2020)