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Tuesday, 28 October 2014 02:25 - - {{hitsCtrl.values.hits}}
“Authorities were able to more than meet their target for the budget deficit in 2014, and aim to bring the deficit lower in the next year. Continued deficit reduction is premised on stronger economic and higher tax revenues, as expenditures will rise further in 2015. Success in hitting the targeted deficit reduction in 2015 would bring Sri Lanka’s fiscal deficit, which has historically been very high relative to rating peers, more in line with the median for similarly-rated countries,” Moody’s said.
However, the Government’s debt burden would remain considerably higher than peers, it added.
Moody’s said since the end of the civil war in 2009, the Government has reaped a peace dividend in reducing its budget deficit from a peak of 9.9% of GDP in 2009.
In 2014, authorities reported a deficit of 5.0%, coming within their target of 5.2%, and is projecting a further shrinkage to 4.6% in 2015. “If achieved, this would bring the deficit below the median average of 5.2% for B-rated peers,” Moody’s said.
Revenues, which have been on a decelerating trend as a percent of GDP over the last six years, posted a reversal in 2014, coming in at 14.1% of GDP.
While growth in revenues (including grants) has been below budgeted levels in 2014, the government is counting on an 18.8% year-on-year increase in 2015, following an 18.1% rise this year, through higher collections of trade-related taxes. If achieved, this would be the highest revenue growth in nine years. Targets may be all the more challenging since they are based on real GDP expanding by 8.2% year-on-year in 2015, versus Moody’s estimate of 7.5% year-on-year, with is in line with Sri Lanka’s potential growth rate.
Moody’s said authorities are relying on a refinance facility to recover disputed tax arrears, which is estimated to generate Rs. 40 billion, nearly 3% of total projected tax revenues. Other proposals include the imposition of a tax on motor vehicle imports, and an increase in excise duties on liquor. These measures are expected to offset a one percent reduction in the value-added tax rate.
With the Government recently announcing that Sri Lanka will hold presidential elections early next year, nearly two years ahead of schedule, expenditure measures are focused on addressing infrastructure deficiencies and meeting social welfare demands from low income groups. Steps include improving rural transport and irrigation networks, expanding railway infrastructure, and the provision of health benefits.
The Budget also proposes a rise in minimum wages for private sector employees, an increase in the employer contribution for provident funds, and a reduction in electricity tariffs for small consumers. However, the increase in recurrent spending is to be more moderate than that of capital spending, which is targeted to increase 26% year-on-year or 6.2% of GDP versus 5.6% in 2014.
Similar to 2014, the Government estimates the Budget to be roughly evenly financed through domestic and foreign funding. Sri Lanka’s continued commitment to fiscal consolidation would help facilitate a reduction in its elevated debt burden, which at 78.3% of GDP in 2013, is significantly above the peer median average of 42.8% and is a constraint on the Government’s credit rating.
In its Fiscal Management Report, also released on Friday, the Government reiterated its aim to bring the debt stock down to 63% of GDP by 2017. These targets are premised on an increase in Government revenues to 16% of GDP over the medium term, as well as on strong growth trends and a gradually improving primary balance, Moody’s said.
