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Recent and Upcoming Fiscal Reforms: Sri Lanka

Recent and Upcoming Fiscal Reforms: Sri Lanka . Dushni Weerakoon Institute of Policy Studies of Sri Lanka. Fiscal Challenges. Fiscal situation remains weak in the face of post-conflict reconstruction challenges Revenue as a percentage of GDP has been declining consistently from the mid-1990s

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Recent and Upcoming Fiscal Reforms: Sri Lanka

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  1. Recent and Upcoming Fiscal Reforms: Sri Lanka Dushni Weerakoon Institute of Policy Studies of Sri Lanka

  2. Fiscal Challenges • Fiscal situation remains weak in the face of post-conflict reconstruction challenges • Revenue as a percentage of GDP has been declining consistently from the mid-1990s • From 20% of GDP to 14.5% by 2009 • 90% of revenue from taxes • Sri Lanka has been grappling with fiscal deficits in the range of 8-10 per cent on average over time Source: Central Bank of Sri Lanka.

  3. Past Fiscal Reforms • Fiscal decentralization • Decentralization of fiscal responsibility at provincial level in 1987 • Rationale political rather than economic • Provincial revenue accounts for 4% of total central govt. revenue; by contrast, provincial expenditure 20% of total central govt. revenue • Created additional layer of govt.; 80% of expenditure of recurrent nature (bulk on personal emoluments) • Tax reforms • moved from turnover to Goods & Services Tax (GST) in 1998 • Introduced at ‘less than neutral’ rate, plus exemptions • National Savings Levy (NSL) introduced to compensate for revenue loss • GST and NSL amalgamated to Value Added Tax (VAT) in 2002

  4. Past Fiscal Reforms • Other • Introduction of indirect taxes such as Nation Building Tax (NBT) • Tax concessions to both domestic and foreign investors • Periodic tax amnesties (11 amnesties since 1964) • Fiscal Management Responsibility Act (FMRA) 2003 • Provides necessary legal framework to meet transparency practices • However, implementation/enforcement of FMRA incomplete • Some due to recovery costs of 2004 Tsunami • Some improvement in budgetary information (Annual Report, Mid-year Review, etc.)

  5. Progressivity • Some improvement in ‘progressivity’ of tax system • Share of taxes on income on the rise • Other measures • VAT offers exemptions on basic commodities • High import duties on ‘luxury’ goods, etc.

  6. Weaknesses in Expenditure • Cutting current spending has proved difficult • Salaries, transfers and subsidies and interest payments on debt take 1/3 each of govt. revenue • Capital expenditure has borne brunt of cuts • Realized capital expenditure has consistently been below budgeted amounts • Capital spending largely financed through borrowing

  7. Impacts on Promoting ‘Inclusive’ Growth • Fiscal constraints have imposed limits on expenditure in key sectors such as health and education • Sri Lanka has also experienced growing regional ‘imbalances’ in economic growth and poverty across sectors/provinces • amongst other causes, lack of investment in infrastructure has been identified as a key bottleneck Source: Central Bank of Sri Lanka

  8. Impact on Macro Stability • Partly in response to fiscal developments, Sri Lanka has faced high and volatile inflation rates • Of even greater concern, is long run fiscal stability in the face of growing debt dynamics • While total debt has declined from a high of 105% of GDP in 2002, decline was partly in response to galloping inflation • The decline in foreign debt to GDP masks Sri Lanka’s increased exposure to external debt servicing obligations

  9. Impact on Macro Stability • Sri Lanka is resorting to costlier commercial borrowing to meet its fiscal needs • Share of such borrowing risen from 4.4% in 2006 to over 23% by 2009 • Ratio of foreign debt service to exports risen from 7.1% to 14.6% over the same period

  10. Future Areas of Reform: Tax • Presidential Taxation Commission • Simplify/rationalize tax system • Broaden tax base • Improve tax administration • Simplify/rationalize tax system • Has over 20 taxes at national level • A relatively high corporate tax of 35% compounded by different rates • Problems with VAT • Exemptions • Periodic change to rates/differential rates • Large refund element • Administrative weaknesses

  11. Future Areas of Reform: Tax • Broaden tax base • Narrow base, low coverage, low compliance, etc. • Exemptions for groups (1.2 million public servants) • Exemptions for companies (local and foreign investors) • Poor compliance due to anomalies, tax ‘culture’, amnesties, etc. • Improve tax administration • Organizational structures, audit, human resources, etc. • Coordination between Inland Revenue, Excise and Customs • Significant discretionary powers that can lead to corruption • Some reforms under way under ADB supported Fiscal Management Reforms Program

  12. Thank You www.ips.lk

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