The announced tax cuts are expected to drive consumption and attract investment which will result in an upward movement of State revenue, a senior government official said.
“With fiscal deficit forecast at 7.5 percent of GDP this year, the government expects State revenue to pick up from the second half, driven by the anticipated uptick in consumption and investment activities due to the tax cuts,” Treasury Secretary S.R. Attygalle said.
He was delivering the keynote address at the Annual General Meeting of the Sri Lanka Apparel Exporters Association in Colombo last week.
“When the Government settles the previous government’s unsettled payments running into Rs. 200 billion, the budget deficit which was to be 5 percent, will now increase to almost 7.5 percent. This means some of the expenditure planned for 2020 will have to be trimmed to contain the fiscal impact,” he said. According to him, Sri Lanka’s economic growth is estimated to have slowed down to 2.7 percent in 2019 with a debt stock of around 82 percent of GDP,” he said.
In 2019, State revenue declined below the 2018 figure, to Rs 1.8 trillion, which is also below the target of Rs 2.4 trillion.
The Treasury projects State revenue to remain at around 11.5 percent of GDP this year. Despite an initial decline in State revenue, Attygalle defended the sweeping tax cuts noting that a simple tax structure with low rates is the best way to revive economic activities.
“There are many ways of reviving the economy, but no economy could be revived with high taxation in times of trouble. In fact, high tax rates get economies into trouble. While there could be an initial decrease in government income, it will pick up from the second half of the year,” he said.
The Government expects the tax cuts to revitalise the small and medium-sized enterprise (SME) sector and the rural economy which had suffered serious setbacks during the past few years. The favourable weather and bumper harvest in the Maha season will further facilitate better money circulation in rural areas. With the anticipated growth in economic activities in the SME sector, the banking sector asset quality would also improve as SMEs account for 25 percent of non-performing loans (NPLs) in the banking sector, he said.
“That’s why we are confident that when disposable income increases, investments will increase and banks will also see a quality enhancement in their loan portfolio,” he said.
Reassuring the Government’s commitment to expenditure rationalisation in the State sector to contain the fiscal deficit within limits, he said that a circular has been issued to all spending agencies stating that they must identify expenditure rationalising measures and they will be monitored by the Department of Management Audit of the Treasury.
He said the Treasury will keep a close watch on the performance of SOEs while stressing that the newly appointed SOE director boards have been advised to “clean up their act and deliver.”
“SOE boards have to deliver. We will introduce performance review mechanisms to these boards with the support of the government,” he added.
The Treasury aims to contain the budget deficit at 4.5 percent from 2021 and to maintain the foreign exchange rate at Rs.180-182 per US dollar and create a stable environment for businesses with added transparency in financing.
“From 2021, the fiscal deficit will be maintained at around 4.5 percent. That means government borrowings are not expected to push interest rates upwards. We expect a fairly low interest rate regime. We wish to explain our borrowings with far more due diligence, better project planning and concerns for variables such as maturity and currency mismatch,” he said.
Promising to deliver the long-delayed structural reforms to maintain economic growth momentum, he said that we are mindful that cyberspace will dominate the way we do business. E-commerce creates opportunities and we will address the need to have a platform that will facilitate the e-marketplace where Sri Lankan brands and companies will have more opportunities.
Outlining Sri Lanka’s trade policy, he said the Government plans to engage with the country’s trading partners to explore how best future free trade agreements (FTAs) can be structured while strengthening the country’s anti-dumping drive.
“Our trade policy will be driven by a system of free trade. But we will protect local businesses against unfair competition. We will strengthen our anti-dumping mechanism. For this, our institutions, from the Customs to Quarantine need to be upgraded,” he said, stressing that the government will maintain a stable and consistent tax policy while supporting industries.
“The government is focused on providing infrastructure and logistics support and we will make our industries competitive. Our tax policy is to ensure a simple system with low rates,” he said.