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Risk of fiscal slippage will force govt. to curtail investments – Moody’s warns

1 December 2015 02:55 am - 0     - {{hitsCtrl.values.hits}}

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By Chandeepa Wettasinghe

The government will be forced to delay the capital investment projects if the revenue targets outlined in the Budget are not met, the global credit rating agency, Moody’s Investors Service (Moody’s) warned.

“If revenue underperforms during the year, as it has in the past two years, authorities may have to revisit investment plans to meet deficit targets, since recurrent expenses will be difficult to roll back,” a report said.

Economists have warned the revenue proposals contained in Budget 2016 are ambitious as the revenue is expected to increase by as much as 38 percent from 2015, thus could result in fiscal slippage.

Moody’s however added that the plans to increase spending on education, health and infrastructure would enhance the growth prospects, and is a better shift in allocation of expenditure.

“Such spending would enhance growth prospects but would further delay Sri Lanka’s fiscal consolidation and add to the government’s already high debt, a credit negative,” Moody’s warned.

Government expenditure increased to 22.3 percent of gross domestic product (GDP) in the 2016 Budget from 19.1 percent in 2015. Recurrent expenditure makes up 15.4 percent, increasing from 14.6 percent year-on-year, and public investments make up 6.9 percent, up from 4.6 percent in the same period.
However, concerns have already been raised over the validity of some investments, such as education.

Revenue is envisioned to increase to 16.4 percent of GDP from 13.1 percent in 2015. According to Moody’s, similarly rated sovereigns have a 21.4 percent revenue to GDP ratio.

Recently, a Central Bank official noted that revenue over recurrent expenditure (revenue surplus) would provide space to maintain the existing accommodative monetary policy stance to spur growth.    

Moody’s said that the 2016 Budget would run into the same risks as previous Budgets if the nominal GDP growth is lower than the forecast or if the government does not receive the higher tax and non-tax revenue as expected.

“Even if Sri Lanka meets its budget deficit target, the government’s fiscal position will remain weaker than most similarly rated sovereigns,” Moody’s added.
It said that the blame is to be placed on the country’s lower revenue growth, especially in value-added taxes.

“This is a result of weak tax compliance and a proliferation of tax exemptions,” Moody’s said.           

The ratings agency said that increasing public sector wages and social welfare in 2015 added to the fiscal pressures, while new proposals to increase treasury guarantees for investments in roads, electricity and drainage will raise the country’s contingent liabilities.

While the Budget said that the 2015 fiscal deficit was 5.9 percent of GDP, Moody’s said that this was 6.9 percent, a figure which Finance Minister Ravi Karunanayake too had quoted last month.

According to Moody’s other B-rated sovereigns have a budget deficit of around 5.5 percent.
 

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