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Wednesday, 4 December 2013 00:02 - - {{hitsCtrl.values.hits}}
Dr. Mathai, while noting that the overall prognosis for the economy was “alright,” mentioned that the Government’s revenue envelope needs to expand to support increasing capital expenditure. He pointed out that the main concern of the IMF was that growth projections of 7.5% upwards in Budget 2014 are too optimistic.
Challenged with uncertain revenue expectations, the result would likely be that the Government will be forced to trim expenditure, especially capital expenditure. However, for Sri Lanka to grow at the projected rates, 6.7% of GDP needs to be spent on capital expenditure. To offset such a situation, Sri Lanka needs to increase its direct taxes, which are woefully low with only 2% of GDP coming from income tax.
“Overall GDP growth has been solid, but recent indicators underline some areas of concern: trade activity has been slow to pick up, tax revenues and public spending including capital expenditure are relatively low and private sector credit growth has been declining. Despite some important tax reforms, revenue performance has been weak in 2013. To some extent, low revenues reflect the weaker imports, but the numerous tax exemptions and tax administrative weaknesses remain important causes of lower than expected revenues,” he said.
Responding to questions on Government giving guarantees for banks to borrow on its behalf, Dr. Mathai stressed that such money should be closely monitored and wisely invested so that the best possible returns will be received.
While praising consistent tax policies in the Budget, he also highlighted the absence of steps promoting compliance such as increasing staff at the Inland Revenue Department, reducing VAT leakage and doing a comprehensive evaluation of tax concessions provided by the Board of Investment (BOI).
He added that easing of monetary policy has been slow to feed through to bank lending, resulting in a slowdown of private sector credit and stated that it would be best to take a breather before tinkering with it more.
Imposing NBT on banks could also result in lending rates going up, negating the incentives provided by monetary policy easing, he observed. The Central Bank allowing a flexible exchange rate will also be crucial going forward.
Dr. Mathai also cautioned the Government on focusing too much on import substitution, insisting that such measures adopted by other countries over previous decades have ended in “total failure”. Instead he advocated supporting exports so the economy can grow sustainably.
Referring to an independent evaluation by the IMF on the US$ 2.6 billion Stand-by Agreement (SBA) concluded in 2012, Dr. Mathai mentioned that it was considered to be successful.
“But some of the issues that Sri Lanka faced needed some time to be dealt with. After all the Stand-By Arrangement was created as a short-term emergency effort to stabilise the economy and get it back on its right feet. But some of the other goals that were in there, goals of improving fiscal and external balance, were things that needed more time. So here I’m talking more about things like State enterprise reform, revenue administration strengthening, these were issues that required more time, required more of a structural look.”
“The board’s assessment was that in the program there could have been more detailed measures, underpinning some of the goals that we laid out. So rather than simply saying the State enterprises should come to breakeven status by such and such a date, there should have an agreement that these are the five steps that are going to be taken to ensure that target is met and that because it is not our normal area of expertise we could have collaborated with the World Bank or ADB.”
He went on to say that consideration could have been given to changing the format of the program. “You see the stabilisation goal was met very quickly. At that point perhaps we could have considered changing from an emergency focused Stand-By Arrangement to a longer arrangement that was more focused on these structural issues.”
A fresh resident representative will arrive in February or March to take over engagement with the Government.
