2016 fiscal deficit goal challenging despite H1 success: Economists

Reuters: Sri Lanka’s fiscal deficit goal for 2016 would still be challenging despite a better-than-expected performance in the first half by the coalition government due to possible populist policies ahead of local elections next year, economists said on Tuesday.

The island-nation’s fiscal deficit was Rs. 328.3 billion ($2.27 billion) in Jan-June, almost half of this year’s target of Rs. 659 billion or 5.4% of the gross domestic product (GDP), the latest finance ministry data showed.

The half-year achievement comes despite President Maithripala Sirisena’s coalition government facing a delay in implementing value-added-tax (VAT) hikes after two court rulings forced it to temporarily suspend the move.

“Based on these numbers, the first-half fiscal progress is far ahead of market expectations. This should boost sentiment with regard to fiscal performance and stability of the economy,” Softlogic Stockbrokers Research Head, Economist Danushka Samarasinghe told Reuters.

“However, concerns remain whether government expenditure in the second half of 2016 and the first half of 2017 could be kept below the target, given local government elections around the corner.”

Shiran Fernando, an analyst at Colombo-based Frontier Research, said curbing the budget deficit from last year’s 7.4% of GDP to 5.4% is ambitious.

Sri Lanka is likely to schedule elections for local government bodies in the first half of next year after delaying them for more than a year due to some changes in the electoral system.

The first local government election since Sirisena came to power in January last year is seen as a key indicator to gauge the new government’s popularity.

The government plans to reduce the deficit to 3.5% of the GDP by 2020 from the last year’s 7.4%. Sri Lanka has committed itself to fiscal consolidation and tax reforms in return for a $1.5 billion International Monetary Fund (IMF) loan approved in July this year.

Finance Minister Ravi Karunanayake, however, said the government can achieve the set targets.

“We will continue our fiscal consolidation plans,” he told Reuters.

Karunanayake said the VAT hike proposals will be presented to parliament in two weeks with some changes.

Cabinet approves VAT 

After several twists and turns Cabinet yesterday approved the increase of VAT from 11% to 15% ahead of the legislation being placed before Parliament in the coming weeks. 

The Value Added Tax (Amendment) Bill was presented to Cabinet by Finance Minister Ravi Karunanayake when it met on Tuesday. The new bill is a consolidation of proposals made by the United National Party (UNP) headed by Prime Minister Ranil Wickremesinghe and the Sri Lanka Freedom Party (SLFP) President Maithripala Sirisena. 

In July the Supreme Court had issued an interim order suspending the VAT increase from 11% to 15% on the basis that the Government had failed to follow due process. Previous attempts to get the bill passed through Parliament fell through after the SLFP and UNP failed to come to a consensus on how the additional tax should be charged. The increase in public revenue is crucial to the Government’s fiscal consolidation plans that are supported by the International Monetary Fund (IMF) under a $ 1.5 billion three-year Extended Fund Facility (EFF).