Budget delays fiscal consolidation
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Finance Minister Ravi Karunanayake reading the 2016 Budget
Sri Lanka’s fiscal position will continue to be weaker than many similarly rated sovereigns, due to its plans to add to education, health and infrastructure expenditures as well as its already high debts, according to international ratings agency Moody’s. The agency also stated that, importantly, the budget would also delay required fiscal consolidation.According to the rating agency’s prediction “On 20 November, if the government’s plans to increase spending on education, health and infrastructure is implemented, such spending would enhance growth prospects but would further delay Sri Lanka’s fiscal consolidation and add to the government’s already high debt, a credit negative”.
It added, “Although Sri Lanka’s deficits are down from a peak of 9.9 per cent of GDP in 2009, fiscal consolidation has stalled, with deficits exceeding original targets in 2014 and 2015. There is a similar risk of the 2016 budget deficit overshooting targets if nominal GDP growth is lower than forecast or if the government does not receive the higher tax and non-tax revenues that the budget expects. The budget foresees government revenues, which have been 12-13 per cent of GDP over the past four years, increasing to 16.4 per cent in 2016. Government expenditures, meanwhile, are set to rise to 22.3 per cent of GDP from 18-19 per cent in the previous four years”.On a more positive note, Moody’s also commented, “Much of this increase in expenses will go toward public investment rather than current expenditures, which is a favorable incremental shift in the composition of expenses.”
At the same time, it further added a cautionary note, signalling that,”if revenue underperforms during the year, as it has in the past two years, authorities may have to revisit investment plans to meet deficit targets, since recurrent expenses will be difficult to roll back. Moreover, even if Sri Lanka meets its budget deficit target, the government’s fiscal position will remain weaker than most similarly rated sovereigns.”
Further, the statement also indicated, “A weak revenue base is the key constraint on Sri Lanka’s fiscal position. Sri Lanka’s government revenue ratio, even if it meets the budget’s ambitious 16.4 per cent of GDP target next year, will remain below the median for B-rated sovereigns, which is 21.4 per cent. The decline in the ratio largely is due to lower growth in value-added taxes collected
which has led to a decline in their share of taxes to 26 per cent in 2014 from more than 40 per cent a decade ago. This is a result of weak tax compliance and a proliferation of tax exemptions.”The proposal to increase the limit for public guarantees of investment in roads, electricity, drainage systems and other infrastructure projects to 10 per cent of GDP from 7 per cent, while also increasing guarantees for public-private partnership projects will raise sovereign contingent liabilities.