Election pledges threaten fiscal targets under IMF

Sri Lanka’s two top presidential candidates are offering election giveaways, from free housing to sanitary pads for women as well as big tax cuts that officials and a credit rating agency are warning would push the country deeper into debt.

Former wartime Defence Secretary Gotabaya Rajapaksa and Housing Minister Sajith Premadasa are in a tight race for the Nov. 16 election at a time when the economy is growing at its slowest in 18 years, and its tourism industry suffering from militant bomb attacks this year.

Gotabaya has vowed to cut a 15 percent Value Added Tax (VAT) by nearly half and abolish some taxes, as a way to reignite consumption, but that would lead to a loss of more than Rs.600 billion (US $3.31 billion), Finance Ministry officials say.

Premadasa, the son of a former president, has promised free housing for all, free school uniforms and meals for students, fertilizers for farmers and sanitary pads for women, aiming to strengthen his following among the rural poor.

He has also offered to raise the threshold income for the value added tax and to reduce other taxes, raising fears that the fiscal deficit target set under an IMF programme could be imperiled under either of the two candidates.

“Unless compensated by significant revenue-raising measures, delivering on the programmes announced so far would delay fiscal consolidation and raise the risk that the government’s debt burden may rise, from high levels,” Anushka Shah, Vice President at the Moody’s credit rating agency said in an email.

Sri Lanka’s fiscal deficit fell to 5.3 percent of the gross domestic product last year from a six-year high of 7.6 percent in 2015 under the US $1.5 billion IMF loan programme. The 2018 target was 4.8 percent. The IMF has urged Sri Lanka to show fiscal discipline.

Premadasa is popular among the poor across all the communities for his poverty eradication policies, while Rajapaksa has gained among Sri Lanka’s Sinhala Buddhists, who account 70 percent of its million people.

Neither candidate spelled out his revenue proposals in his manifesto. Sirimal Abeyratne, an economics professor at the University of Colombo, said most pledges are unlikely to be implemented. “This is our political culture. This is part of our self-destructive democracy.”

But Sarath Amunugama, a former finance minister backing Rajapaksa, said the party had a plan for revenue and if needed, it would renegotiate with the IMF.

Harsha de Silva, Economic Reforms Minister, said that under a Premadasa government, hopes would be pinned on greater private investment to drive growth and generate revenue. 
(REUTERS)