REUTERS: Sri Lanka’s 2016 Budget raises questions about its ambitious revenue and capital expenditure targets as the government is falling far short of steps needed to improve the tax system, a top International Monetary Fund (IMF) official said yesterday.
Todd Schneider, the mission head for Sri Lanka’s post IMF lending programme, said the country’s tax-to-GDP ratio is one of the lowest in the world, and tax efficiency is low compared with its peers.
“The fundamental solution to this problem involves restructuring the tax framework and tax administration to make the system simple, fair, and efficient,” Schneider said in an opinion editorial sent to Reuters.
“The proposed Budget falls far short of steps needed to move the Sri Lankan tax system in this direction.”
Schneider welcomed the Budget’s proposed increase in capital expenditures in the context of long-standing public investment needs, but also raised concern about whether the overall targets can be met.
“The risk is that capital spending could be slashed in the event of revenues falling short, which has been the case for the past several years. This underscores the need for realistic revenue estimates which would then provide greater certainty to the path of critical expenditures.”
Overall expenditures are expected to grow by a brisk 30 percent, with recurrent and capital spending increasing by 17 and 70 percent, respectively, the IMF official said.
Sri Lanka doubled a nation-building tax and adjusted the corporate tax structure in its Budget for 2016 on November 20 to finance greater government spending in health and education, and accelerate the pace of economic expansion.
Schneider said the targeted rise of almost 40 percent in the 2016 revenue seems “perhaps overly ambitious”, compared with the average 12 percent revenue growth over the past 20 years.
Since the Budget announcement, Finance Minister Ravi Karunanayake has amended some revenue proposals including vehicle permits for state sector employees, raising concerns over achieving the revenue and budget deficit goals.
The finance minister expects to cut the budget deficit marginally to 5.9 percent of the GDP in 2016 from a revised 6 percent this year. Karunanayake earlier expected this year’s deficit to be 6.9 percent.
Fitch Ratings said the 2016 Budget provides no clear plan for fiscal consolidation over the medium term, but added that an ambitious set of reforms would be positive if achieved.