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Moody’s cautions on deficit target over revenue shortfalls

22 June 2015 02:56 am - 0     - {{hitsCtrl.values.hits}}

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Says political uncertainty could hamper investor sentiment

Global credit rating agency Moody’s Investor Services in a recent credit upgrade said Sri Lanka’s budget deficit target is at risk due to possible shortfalls in revenue.

The new government presenting an interim budget this January said it was targeting a budget deficit of 4.4 percent of GDP for this year, slightly lower than the previous government’s 4.6 percent target. 

To achieve this, the government introduced several new revenue means by way of taxes on high-income individuals and corporations as well as some reduction in capital and current expenditures. 

However, most of these revenue proposals have not yet become laws passed by Parliament and therefore, the government so far hasn’t been able to collect the tax money.

This has partly led to the temporary stoppage of some the infrastructure projects, apart from the revisits of the projects by the new government to reduce costs. 

To meet its liabilities, the government was seeing aggressively selling treasury instruments. And also, US $ 988 million was recently raised through a sovereign bond issue. 

Finance Minister Ravi Karunanayke said recently the government was planning to raise up to US $ 2 billion through a syndicated loan arranged by foreign banks. 

Moody’s in the report pointed out that revenue has been declining as a percentage of GDP since 2006 with the exception of a slight increase in 2011. The interim budget assumes revenues will rise 14.1 percent year-on-year.

Sri Lanka missed its budget deficit target for the first time in the post-conflict period, as the country reported a fiscal deficit of 6 percent of the GDP for the year 2014, amid revenue collection shortfalls and higher expenditure.   

The government aimed to reduce the deficit to 5.2 percent of GDP in 2014 from 5.9 percent of GDP in the previous year. 

Meanwhile, Moody’s cautioned about current uncertain political environment saying that it could dampen investor sentiment, while stating that Sri Lanka’s 2015 Presidential election exemplified the country’s democratic institutions. 

“However, this year has been characterized by parliamentary conflicts and uncertainty around the timing of parliamentary elections. A prolonged period of uncertainty could affect the growth outlook by dampening investor sentiment.”

“Moreover, it is unclear what effect tax increases will have on investment sentiment,” Moody’s noted. 
 
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