Budget deficit likely to hit 7% this year: FinMin

The Finance Ministry yesterday said this year’s budget deficit is likely to settle around 7 percent of gross domestic product (GDP) due to significant dip in revenue amid slow growth and increase in election-related spending.

Sri Lanka had previously set a fiscal deficit target of 4.8 percent of GDP for this year under the International Monetary Fund loan programme.

The country’s fiscal deficit fell to 5.3 percent of GDP last year, from a six-year high of 7.6 percent in 2015. 

“The expected fiscal deficit for 2019 will be more than the estimated and could settle around 7 percent of GDP, due to both a significant dip in revenue than expected mainly due to slow growth and increase in election-related spending,” a Finance Ministry communiqué issued yesterday evening said.

“Thus, the government will make a concerted effort to recalibrate its operations along a sustainable deficit reduction path towards 4 percent of GDP in the medium term, together with a rationalisation of the debt stock to manageable levels.

Many such measures are in the pipeline to ensure that strong fiscal discipline is maintained within the government machinery so that public resources are used effectively, ensuring fiscal responsibility.

These efforts will be complemented by the continued relationship with international financial institutions (IFIs) and development partners, who have committed to Sri Lanka’s progress and prosperity,” it added.

Meanwhile, justifying the fiscal stimulus package announced last week by way of sweeping tax cuts, the Finance Ministry said it was targeted at increasing the aggregate demand in the economy.

“This reform initiative is undertaken in the background of many economic challenges as the Sri Lankan economy has recorded a less than 2 percent growth in GDP together with rising inflation outlook. Budget deficit too has exceeded the announced fiscal target.

Moreover, the government has observed that the low growth in credit and monetary aggregates along with the underperforming economy, there is leeway to provide a substantial fiscal and credit stimulus to increase aggregate demand in the economy.

Hence, this is timely as it stimulates economic activities and eases the tax burden on the public. 

This will also create a conducive environment for the private sector for their business planning and investment decisions thereby more economic activities will be generated in the short to medium term, boosting economic growth,” the Finance Ministry communiqué said.

The tax cuts, which included a reduction in the Value-Added Tax (VAT) rate, increase of tax-free threshold of Pay As You Earn (PAYE) tax and the removal of Nation Building Tax (NBT), were announced after the maiden Cabinet meeting of the Rajapaksa administration last Wednesday.  

The removal of NBT and the reduction of the value of VAT to 8 percent are expected to reduce the prices of most goods and services, which may result in a moderation in inflation. 

Meanwhile, the Finance Ministry assured that these policy measures would be implemented “within a coherent policy framework, consistent with other key reform priorities with regard to public expenditure management, state enterprise improvements and simplification of administrative systems and procedures to provide quality governance.”

“The government’s immediate priority is to capitalise the opportunity created for 2019/2020 Maha season by favourable weather to get the agriculture sector to a full capacity to improve the livelihood of the farming community and ensure food security.

The incentives provided for tourism, IT and enabling services, construction and property market, exports and rural agriculture and overseas employment earning for professionals are expected to drive the economy with price stability,” the communiqué added.

The Finance Ministry also pointed out that the government’s commitment towards a prudent fiscal management regime is reflected in its decision to rationalise the Cabinet of Ministers and restriction on non-priority spending.

“As approved by the Cabinet of Ministers, instructions have already been issued to all ministries, departments, state enterprises and other institutions, that action must be taken to control their expenditures, including managing the staff, establishment costs, restricting vehicle purchases, building and office spaces and undue year end purchases thus adhering to strict budgetary discipline complimented by a strong monitoring framework.

The reduction in the indirect taxes will generate substantial savings in the ministries, departments and other institutions as well,” the Finance Ministry said.

On the same lines, arrangements are in place to make appointments to key positions in state-owned enterprises (SOEs) through a selection process, led by a special committee, with the aim of finding qualified and talented personnel to turn around the loss-making SOEs to profitable entities.