SL low tax revenue will subdue COVID-19 recovery: Moody’s

Tuesday, 13 October 2020 01:35 - - {{hitsCtrl.values.hits}}

New report warns countries struggling to increase taxes before virus will face additional challenges
Says Govt’s ability to implement and enforce effective revenue-raising measures important credit driver over the next few years
Subdued global recovery will shift focus to broadening tax bases, which will be challenging

Emerging market economies, including Sri Lanka, that were struggling to increase tax revenue before the COVID-19 pandemic will face additional hurdles and subdued recovery in the medium term, a new report from international rating agency Moody’s warned yesterday.

Emerging market (EM) sovereigns will suffer long-lasting revenue losses due to the coronavirus crisis, with governments’ ability to implement and enforce effective revenue-raising measures set to be a key credit driver over the coming years, the report said.

With the support of development finance institutions, EM governments will look to implement or resume tax-raising measures. However, only a few governments have successfully raised revenue much faster than GDP growth over the last 10 years, Moody’s pointed out.

“Sovereigns with a pre-existing and established focus on raising taxes from low levels like Costa Rica, or past episodes of effective tax policy changes like Georgia and Montenegro, will likely fare better. Sovereigns already struggling to increase their tax intake before the pandemic, like Tanzania and Ethiopia, Sri Lanka, Pakistan and Bangladesh will face additional hurdles,” the report said.

Almost all EMs will record budget deficits this year and face constraints in cutting spending amid the pandemic, amplifying the importance of revenue generation. EM fiscal revenue will stay below pre-crisis levels amid a slow and halting global recovery. On average, EM governments will lose revenue worth 2.1 percentage points of GDP in 2020, above the 1.0 pp loss in Advanced Economies (AEs).

“The coronavirus crisis has underlined the importance of revenue generation for emerging market governments,” said Lucie Villa, a Moody’s Vice President - Senior Credit Officer and the report’s author. “For EMs, any fall in revenue is particularly important for creditworthiness because their government spending needs – social, infrastructure and debt financing – are often more urgent than for advanced economies, and they have a generally narrower revenue base.”

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