Fiscal front improves as deficit drops to 4.1% in 9 months

Despite the delayed increase in the value-added tax (VAT), the government has been able to show an improved fiscal performance during the first nine months of the year with the revenue rising and the deficit narrowing, the latest official data showed. The fiscal deficit declined to 4.1 percent of gross domestic product (GDP) from 5.1 percent in the same period last year as the revenue was bolstered by the increased tax revenues.

An improving fiscal front is a sign of improving macroeconomic conditions as it will not inject excess liquidity into the economy, which generally leads to higher inflation, higher nominal interest rates and overvalued exchange currency. Better fiscal conditions enable an economy to maintain lower inflation, lower nominal interest rates and a competitive exchange rate, which support the exports and competitiveness of an economy.

Total revenue rose to 9.6 percent of GDP during the nine months from 8.5 percent in the corresponding period last year. The tax revenue rose 22 percent, according to the Central Bank, to 8.7 percent of GDP from 7.9 percent of GDP during the same period last year. In absolute terms, the tax revenue during the period was Rs.1,067 billion, compared to Rs.882 billion recorded during the corresponding period last year.

Sri Lanka’s tax revenue to GDP is amongst the lowest in the region as well as in the world but the efficiencies in tax administration appears to have improved the revenue in 2016. Both income tax and revenue from VAT increased by 27 percent and 20 percent year-on-year (YoY), respectively, due to the introduction of the Revenue Administration Management Information System (RAMIS) by the Inland Revenue Department. The budget 2017 also showed greater commitment towards revenue enhancements and fiscal consolidation as the government expects to contain the fiscal deficit to 4.6 percent of GDP in 2017 compared to 5.5 percent estimated for this year.

The 2017 tax revenue is estimated to increase by 27 percent to Rs.1.82 trillion or 13.5 percent of GDP from estimated 11.6 percent of GDP in 2016. Meanwhile, the total expenditure and net lending during the nine months to September has slightly increased to 13.7 percent of GDP from 13.5 percent in 2015. Capital and net lending rose from 2.8 percent of GDP in 2015 to 3.1 percent of GDP in 2016 while the recurrent expenditure slightly declined to 10.6 percent of GDP from 10.7 percent of GDP in 2015.