EIU says government’s budget deficit target ‘too optimistic’

12 March 2015 04:55 am

Revises 2015 GDP growth forecast upwards to 7.7% 


Echoing the sentiments recently expressed by the International Monetary Fund (IMF), the research arm of the London-based publication The Economist said the fiscal deficit target of the new government is “too optimistic”.
Finance Minister Ravi Karunanayake projected a budget deficit in 2015 equivalent to 4.4 percent of gross domestic product (GDP), lower than the 4.6 percent of GDP forecast in the previous government’s 2015 budget.
“Although lower global oil prices may help to reduce the government’s energy subsidy bill, we assess that the government’s projection is too optimistic,” Economist Intelligence Unit (EIU) said in a country report.
EIU predicted a budget deficit (excluding grants and privatisation) of 5.7 percent of the GDP for 2015, as same its estimated level in 2014.
“We then expect the budget shortfall to shrink gradually to reach 3.9 percent of GDP in 2019, as revenue increases because of improved tax collection.” An IMF mission that visited Colombo last week said the fiscal deficit target of 4.4 percent of the new government would be “challenging”, should revenue fail to materialize as projected.
Along with expenditure cuts, the interim budget came up with a number of one-off taxes to raise revenue, some of which were retrospective in nature.
“…the one-off tax measures introduced to finance the interim budget do not, in the mission’s view, constitute a step toward a more effective tax system,” a statement by the IMF mission said.
Meanwhile, EIU revised Sri Lanka’s economic growth forecast in 2015 upwards to 7.7 percent from 7.5 percent owing to fall in global oil prices and boost in private consumption. 
“In 2015-19 private consumption, which accounts for around 65 percent of nominal GDP, will be the main engine of economic expansion, fuelled by rising incomes and remittances from Sri Lankans abroad.”
EIU further said despite the new government’s recent policy decisions may deter some investment, overall investment growth will remain robust, supported by reconstruction efforts in the north and east of the island as well as business and property investment, fuelled by growth in the services sector. 
“We forecast that real GDP will grow by an annual average of 7 percent in 2016-19. The pace of economic growth would be stronger were it not likely to be constrained by fiscal consolidation.”