25 February 2021 09:18 am
ICRA Lanka Limited said that it expects the government revenue, which took a battering during 2020, predominantly due to the pandemic-related disruptions and partially due to the generous tax cuts, would return to normalcy by the start of the second half the year, as economic activities have begun to rebound.
In its Economic Outlook for 2021, the rating agency also said that as the government’s fiscal policy is now more closely aligned with the Modern Monetary Theory, there would be less market borrowings by the Treasury, as they look to the Central Bank for liquidity support, with interest rates hovering at an all-time low.
However, the rating agency cautioned that the government could overshoot the fiscal deficit target in 2020 to 10.8 percent of gross domestic product (GDP), as the recurrent expenditure could surpass the original projections and thus the government might be compelled to cut down on capital expenditure to rein in the deficit from what they have planned to spend.
The government expects to spend Rs.2.5 trillion on recurrent expenditure and Rs.1.0 trillion on public investments, on revenues projected at Rs.2.0 trillion in 2021. That leaves room for a fiscal deficit of 8.9 percent of GDP, before trimming it down gradually to 3.5 percent of GDP through 2025, in its medium-term fiscal consolidation strategy.
“On the fiscal front, we expect the government revenue to gradually return to normalcy by the 2H,” ICRA Lanka said, albeit there could be a shortfall of about Rs.450 billion, due to the still “fragile state of the economy and the revenue loss from import controls”.
Sri Lanka’s tax revenues nearly returned to 2019 levels in August and September, in a sign that the government is capable of generating enough revenues from taxes through a well-functioning economy, as lower taxes act as a stronger economic stimulus for both consumers to spend and the businesses to expand and distribute profits.
ICRA Lanka does not call for a change in the current tax policy, which was welcomed by the country’s private sector when the budget 2021 was presented in November 2020.
Those who call for the International Monetary Fund (IMF) intervention is well aware of what’s in store in its policy reform package, consisting predominately of higher taxes, higher interest rates and politically suicidal institutional reforms, which at this juncture are far from pragmatic. And the country has a working economy now, supported by the current alternative economic policy.
Sri Lanka’s tax revenues to GDP collapsed, businesses and consumer spirit nearly got killed while the economy plunged to the worst growth performance in two decades during the four-year engagement with the IMF, just for a US $ 1.5 billion released in several tranches, akin more to a parent-son relationship.
The notion that the IMF can fix economies is a fallacy and the countries at this level of development should never fall for that trap before the economy and its population reach some maturity to withstand that shock the IMF brings with its policy package.
Meanwhile, ICRA Lanka commenting on the current strategy of the government’s fiscal policy said that it would less rely on domestic sources for borrowing, as the historically low interest rates allow it to lean more on the Central Bank liquidity or more colloquially, money printing.
“The government’s fiscal policy is now closely aligned with the Modern Monetary Theory (MMT). This means we can expect the Treasury to rely less on the market borrowings while lean more towards financing spending via short-term direct borrowings from the Central Bank,” the rating agency said.
“In the meantime, impaired access to foreign markets may bring down the foreign currency-denominated debt. Total stock of debt will exceed Rs.16.3 trillion and expected to reach 99.3 percent of the GDP,” the rating agency added.