Finance Secretary at Economic Summit:

Sri Lanka's fiscal deficit, lowest since 1977

Finance Secretary Dr. P.B. Jayasundera sounded emphatic and confident over the Government's resoluteness to pursue a downward path with regard to fiscal deficit, given the success of measures put in place already and those planned in the short- to medium-term.

"The Government remains committed to see the deficit reduction path in the post-conflict period continued, to reach further progress in 2014 and 2015, to bring the deficit to below five percent," Dr. Jayasundera told a packed Ceylon Chamber of Commerce Economic Summit last week.

He said the analytical work undertaken by the Department of Fiscal Policy also indicates that an economic growth in excess of six percent with a fiscal deficit reduction towards five percent from the current level is conducive to bring the debt to GDP level down to 70 percent by 2015 and to below 60 percent by 2020.

Despite a mixed performance in terms of managing the fiscal deficit in the first half, Dr. Jayasundera said the Finance Ministry was confident that there will be improvement in the second half of this year over the contraction witnessed during the second half of last year. "This, together with continued moderation in recurrent expenditure, the deficit set for this year at 5.8 percent is realisable," he said, adding that the medium-term target was consistent in accommodating available long-term financing at relatively low rates from foreign development partners and domestic sources while creating an increased space for private borrowing.

Monetary policy

"This level of deficits over the 2013-15 medium-term fiscal framework within which the Government formulates its fiscal strategy is conducive to provide greater freedom to the Central Bank to conduct its monetary policy towards a mid-single digit inflation," said the Finance Secretary who also sits on the Monetary Board.

Noting that Sri Lanka today has the lowest fiscal deficit since 1977, Dr. Jayasundera in his speech titled 'Managing the fiscal deficit towards securing stability and development' at the Summit's first session, also quantified the planned deficit reduction towards four percent by 2015.

"In fact, that was the deficit Sri Lanka seemed to have maintained in 1950. Given that the 2013 deficit target of 5.8 percent remains a firm commitment of the Government to ensure a continuity for the fourth year in such a downward direction is noted, we need a further two percentage points or about a Rs. 250 billion reduction over the next two years in our efforts to raise revenue or allow recurrent expenditure growth to moderate by that amount or a combination of both," he said. He said since feasibility improves with a proper distribution between revenue and current expenditure, the required adjustments appear manageable due to several reasons.

First, the effects of the moratorium on tax holiday extensions should bring the balance 40 percent out of total commercially functional BOI enterprises of 1962 at the end of 2012 to the tax system over the next two to three years, that is of about 330 commercial operations.

Second, full operations of VAT at retail level commenced this year with a further rationalisation of the exemptions list together with intensified tax audits of large and corporate taxpayers including the SVAT arrangement now in place to simplify the application of VAT to zero-rated category which should improve the tax elasticity of the VAT system.

Sharp adjustments

Third, the normalisation of imports following the sharp adjustments made to bring imports in line with normal trends should reflect a recovery in revenue collected at the point of imports through applicable taxes which have been simplified recently depending on the purpose for such taxes and administrative convenience. Dr. Jayasundera also said the Government has been successful in managing the primary deficit, which has declined from two percent of GDP in 2006 to 1.1 percent in 2012, underscoring substantial adjustments in non-interest expenditure and the reduced debt creation tendency. However, he said despite all these, fiscal management towards securing stability and development is not free from risks and vulnerabilities. One such major challenge, according to the Finance Secretary, is the vulnerability of the budget to extreme fluctuations in weather conditions that the country has begun to experience increasingly in recent years.

He said this aspect is a subject of interest for the World Bank, which has already deployed a mission to study options to insulate the budget from such pressures. "I will also not underestimate the resistance for cost-reflective price adjustments to progress as the private sector still lives on subsidies on electricity and fuel.

They need to move away, allowing us to target them only to the needy segments of the population and SMEs. Tax dodging through evasion, avoidance and the use of so called tax planning may undermine the envisaged improvements in taxation," Dr. Jayasundera said. "Credible and feasible adjustments are sensible than undeliverable ambitions in relation to fiscal management. So, let us not be academic and over-dramatise these either. Management of the fiscal deficit is real and we have to do it in a very complex economic environment.

The silver lining, however, is the relatively low defence expenditure and the much stronger security that is prevailing in the country which make fiscal policy management much easier than what I have experienced before from the same position that I have the privilege to address this summit from today, which has evolved a much more promising outlook for the country to secure stability and development," the Finance Secretary told the Ceylon Chamber forum.

Courtesy: www.ft.lk