COLOMBO: Sri Lanka’s tax hikes will strengthen the revenue base, but some of the revenue assumptions look optimistic and government debt remains stubbornly high, Fitch, a rating agency said.
Sri Lanka hopes to reduce the budget deficit to 4.6 percent of gross domestic product in 2017 from 5.4 percent in 2016.
“Fiscal consolidation will be helped by tax reforms that should go some way to bolstering the weak revenue base, which is a key reason for the sovereign’s weak fiscal finances,” the rating agency said.
“However, Fitch Ratings believes that the impact of the revenue reforms will depend on implementation; and some of the budget assumptions look optimistic, posing risks to the projections.”
The government’s real GDP growth projection of 6 to 7 percent for 2017 is higher than Fitch’s estimate of 5 percent. Fitch downgraded Sri Lanka’s sovereign credit by one notch to ‘B+’ in February. The outlook was also cut to negative.
A program with the International Monetary Fund had helped ease balance of payments problems and the budget targets are also in like with the program Fitch said.
Fitch Ratings-Hong Kong/Singapore-16 November 2016: Sri Lanka’s budget for 2017 is broadly in line with the targets set out under its IMF programme, and contains a number of positive measures to boost the very weak revenue base. However, Fitch Ratings believes that the impact of the revenue reforms will depend on implementation; and some of the budget assumptions look optimistic, posing risks to the projections.
The 2017 budget targets a fiscal deficit equivalent to 4.6% of GDP, down from an expected 5.4% in 2016 and 7.4% in 2015, when the deficit widened mainly as a result of sharp public-sector wage rises. Fiscal consolidation will be helped by tax reforms that should go some way to bolstering the weak revenue base, which is a key reason for the sovereign’s weak fiscal finances.
The reforms include a hike in the VAT rate from 11% to 15%, along with tax measures announced in the budget – such as a 10% capital gains tax that is scheduled to be introduced next year and an increase in the top personal income tax rate. The government also expects to generate more revenue from the simplification of the tax system and removal of some tax exemptions and concessions. The government projects that revenue will increase by close to 27% in 2017, pushing the revenue/GDP ratio up to nearly 15% of GDP from an estimated 12.9% in 2016.
Fitch views the new measures as a positive step, but there is a risk of a shortfall. The impact of the tax reforms will hinge on effective implementation. Moreover, the government’s GDP growth forecast for 2017 of between 6%–7% is higher than what Fitch believes is likely, given the expected drag from fiscal consolidation. Our growth forecast for 2017 is around 5%.
