The global rating agency, Fitch Ratings says Sri Lanka’s budget for 2018 sticks broadly to the targets for fiscal deficit reduction under its three-year IMF program, which began in June 2016.
However, high government debt and the large cost of debt servicing weigh heavily on Sri Lanka’s credit profile and will require sustained fiscal consolidation over the long term.
The recently announced budget targets a fiscal deficit of 4.8% of GDP in 2018, which is only slightly above the 4.7% target agreed with the IMF and continues the consolidation that began in 2016.
Floods and drought weighed on the economy and public finances during 2017, and contributed to the government missing its initial 2017 fiscal deficit target of 4.6% of GDP.
Nevertheless, the authorities still expect the 2017 deficit outturn to fall to 5.2% of GDP, from 5.4% in 2016. Consolidation in 2017 has been driven by measures to boost tax revenue, including a hike in the value-added tax (VAT) to 15% in November 2016 from 11%.
The government expects revenue to rise strongly again in 2018, to 15.7% of GDP, from 14.7% in 2017. Revenue should be supported by an Inland Revenue Act passed in September 2016, provided implementation is effective. The act, which will come into effect from 1 April 2018, aims to simplify the tax laws and improve the efficiency of the system.
“Despite these positive reforms, we see downside risks to the government’s revenue projections, given that they are based on a GDP growth assumption of 5%-6% for next year, compared with our own of 4.5%,” Fitch said.