2014 Budget based on 7.5-8% growth projection concern for IMF
Tuesday, 26 November 2013 01:11
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The IMF yesterday said there are many elements of the 2014 Budget that should be “applauded” and were “worthy of praise,” but expressed concerns over the fact that it was based on a higher growth rate of 7.5% to 8%.
With the IMF having forecasted for Sri Lanka a stable growth of 6.5% to 7% for 2014, it said the over projection would result in the country facing a short fall in revenue.
Addressing a post-Budget forum jointly organised by the Daily FT and the MBA Alumni Association of the University of Colombo at The Kingsbury yesterday, IMF Sri Lanka Maldives Resident Representative Dr. Koshy Mathai said: “If we (IMF) are right, then we have revenues in this Budget that are likely to be overoptimistic, which means that at the end of the year, Sri Lanka may once again face a situation to meet a deficit target and resort to expenditure cuts, be it current or capital.”
This he noted whilst the Government has remained committed on a path of a lower budget deficit.
Earlier on, Mathai commended the Government for ensuring consistency in the general policy framework, mainly in the area of tax rates. According to him, to achieve such is imperative and Sri Lanka having become “accustomed” to it and “taking it for granted” is a wonderful development.
He also noted that with the 2014 Budget, there will be a deficit reduction, although the nation continues to have high deficit and debt ratio.
Pointing out that revenues are “clearly” an issue, the proposed Budget taking some important measure to increase the same was well received by the institution.
“I think we are particularly happy to see the extension of the VAT further into the retail sector. Lowering of the threshold of Rs. 500 million to Rs. 250 million will increase the tax collection while reducing some of the disparities, where only one segment of the retail sector was taxed previously,” said Mathai.
Recommending ways of raising revenues, in addition to the VAT extension, Mathai opined there were other areas that deserve more action.
While Sri Lanka gathers 2% of GDP with corporate and personal income tax, he asserted that one issue that has plagued corporate income tax in the past was the extension of tax holidays.
Stating there has been a change in the attitude of the Government since the end of the war, he stressed the need for a more strategic and considerate approach to granting tax relief.
“I think it will be fairly useful to disclose the finality of tax reliefs. There should be a comprehensive review of the tax holidays and exemptions that are out there in the system so that everybody understands what’s there and see how that can be improved on over time,” stated Mathai.
Furthermore, while extending NBT to the financial sector would help the country fetch higher revenues, Mathai however expressed some concerns.
“I have some concerns that we are putting a tax on financial intermediation in a system where the banking system does not work all that well. Whether it’s because of inefficiencies or lack of competition, the net interest margins in banking in Sri Lanka are extremely high at 4 to 5%. If you look at cross-country banking data in the region, you see that the profitability in the Sri Lankan banking sector is one of the highest of all. Now, you can say good and let’s tax banks, but that strategy does not always work,” he told the forum.
“These same people who are keeping the net interest margins high will likely take that increased tax and pass it on to the borrower. We may see higher borrowing rates as a result,” added Mathai.
This measure he asserted is a “move in the wrong direction” in terms of helping the efficiencies of the intermediation, which ultimately will be a key ingredient towards sustaining growth over the medium term.
