Budget assumption of rapid GDP growth ‘overly optimistic’ – Fitch
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With revenues relying on increased external trade taxes, Sri Lanka’s 2016 budget may be “overly optimistic” should it fall short of its underlying 7 to 8 per cent GDP growth assumption, according to Fitch Ratings Sri Lanka. Elaborating, Fitch said in a media statement that the government expects “total tax revenue relative to GDP to rise in 2016 and overall revenues to jump by 38 per cent versus 17 per cent in 2015, but a large share of this increase comes from non-tax revenues. Much of the increase in non income tax revenues is likely to come from external trade taxes, which should rise by 44 per cent to account for 23 per cent of the total tax intake.
This assumes a strong global trade environment, and underscores budget assumptions for rapid GDP growth. High GDP growth has been a positive factor for Sri Lanka’s credit profile. However, Fitch believes that the budget’s assumptions may be overly optimistic. The budget expects GDP growth to accelerate to 7 to 8 per cent in 2016, from expected growth of 6 per cent in 2015, while Fitch forecasts growth of 6.4 per cent in 2016.”Commenting further, Fitch indicated that the “government plans for a deficit of 5.9 per cent of GDP in 2016, which is only a slight reduction from the 6 per cent shortfall expected this year
Notably, the original 2015 deficit plan of 4.4 per cent will be exceeded by a wide margin, underscoring that government’s track record of meeting fiscal targets is not strong. Fitch believes there are risks to government being able to meet its fiscal deficit target, especially considering the trend in revenues in recent years… Expenditures will add to Sri Lanka’s fiscal challenges ¬ total expenditure is likely to rise to 22.3 per cent of GDP from 19.1 per cent in 2015. Major increases in public investment in education, infrastructure and healthcare could lead to an increase in the general government deficit in the near-term, while the benefits to fiscal accounts over the medium-term are unclear.”
It also added, “General government revenues have been declining consistently since 2010, a key weakness in the sovereign’s credit profile. Revenues had fallen to just 12.3 per cent of GDP in 2014, far lower than the ‘BB’ median of just over 25 per cent. This latest budget does little to address the revenue issue directly. Inability to raise general government revenues are related to structural weaknesses in tax administration and collection. As such, it is notable that income tax collections are estimated by government to decline by 6.4 per cent in 2016.”
Having recently issued a statement on the November 20 Sri Lanka budget, Fitch’s overall view was that it provided “no clear plan for fiscal consolidation over the medium term. The absence of such a framework means that the risks of further deterioration in the fiscal deficit will remain, and high public debt relative to Sri Lanka’s ‘BB’ group median is not likely to decline… The government did take the opportunity of the budget announcement to reiterate an ambitious set of economic reforms aimed at raising foreign investment and boosting the private sector’s participation in the economy. If achieved, these broad objectives could be positive for the economy, especially if it reduces dependence on external borrowing to finance growth. Weak governance standards remain a factor for low FDI, so any improvements to the ease of doing business could enhance the economic profile over the long run”.
(JH)