Sri Lanka’s May fiscal deficit down; tax collection up 13%

By Chandeepa Wettasinghe
Sri Lanka’s fiscal deficit for May 2017 fell 10.93 percent compared to 12 months ago to Rs.52.16 billion, with increased public investment overtaking higher income revenue, pushing the deficit for the first five months of the year down, overshadowing progress made earlier.

Tax collection this May increased 13.15 percent year-on-year (YoY) to Rs. 143.50 billion. Since the increased Value Added Tax (VAT) rate was in operation between May and mid-July last year, albeit illegally, the increase in revenue this May could possibly be attributed to increased efficiency in collecting taxes.

May 2017 was the last month the controversial minister Ravi Karunanayake was in charge of the finance portfolio.

Current expenditure for the month was kept at a controlled Rs.143.25 billion, increasing just 1.87 percent YoY.

Interest payments, and the salaries and wages of the public sector—the two main current expenditure accounting for Rs. 100.56 percent of the total, almost evenly split between each other—increased 7.43 percent and 4.31 percent YoY respectively.

The main expenditure cuts were from fertilizer subsidies—which were in low demand given the drought in key agricultural areas preventing cultivation of crops—and other miscellaneous expenses. For the second month in a row the government managed to keep its revenue well ahead of its current expenses, with the balance this May recorded at a Rs. 10.28 billion surplus compared to a Rs. 3.35 billion deficit YoY. Under the capital expenditure and net lending for May, public investments increased 31.82 percent YoY to Rs. 59.07 billion. Meanwhile, the budget deficit for the first five months of 2017 increased 1.73 percent YoY to Rs. 285.34 billion.

However, the International Monetary Fund (IMF) had just last month said that Sri Lanka’s Treasury was over performing in its fiscal management.

The government had set an overall deficit target of 4.7 percent of gross domestic product (GDP) this year, compared to 5.4 percent of GDP last year. 

However, the World Bank is expecting the budget deficit to end up at around 5.2 percent of GDP this year. The key indicator is however the 3.5 percent of GDP deficit target for 2020 under the IMF reform programme. The government last week decided to distribute packages of essential food items in drought stricken areas, and cut taxes on 47 essential items. These, coupled with any future fiscal stimulus to help the recovery of these regions could cut into the deficit targets for this year. 

The Central Bank too last week said that while the fiscal consolidation so far has been positive, it is observing if any significant future slippages will occur.Tax revenue for the first five months of 2017 increased 22.84 percent YoY to Rs. 697.79 billion backed by increased VAT collection. Current expenditure meanwhile increased 9.8 percent YoY to Rs. 769.30 billion due to higher interest payments. The gap between revenue and current expenditure improved to a Rs. 26.75 billion deficit from a Rs. 90.36 billion deficit YoY. Capital expenditure and net lending meanwhile increased 36.06 percent YoY to Rs. 259.29 billion, driven by public investment. 

The government started construction on Phase II of the Central Expressway earlier this year. Net financing for the first five months of 2017 increased just 1.73 percent YoY to Rs. 285.34 billion. Net foreign financing increased to Rs. 63.39 billion, pushed up by foreign borrowings which more than doubled to Rs. 133.26 billion. Net domestic financing fell 21.40 percent YoY to Rs. 221.94 billion.