Swear on VAT; no sweat on foreign cash – CB says
The Central Bank (CB) this week reiterated that the issue of the troubled Value Added Tax (VAT) has to be sorted speedily but noted that there’s no need for any foreign borrowing in the short term. ”A major part of the government’s stabilisation programme is fiscal consolidation and a major part of that is increasing revenue and the central part in increasing revenue is VAT. Clearly it is important that we need to resolve the VAT issue as quickly as possible,” CB Governor Dr. Indrajit Coomaraswamy told reporters on Thursday after a CB’s monetary policy meeting adding that the economy is set to meet its annual growth target of 5.5 per cent and mid-single-digit inflation.
“The government is undertaking a major tax review and the outcome of that review will be presented in the budget speech in November. At a time when the Government has very limited fiscal space and it wants private investment to play a bigger role in the development process, you have to then balance out whether this is the right time to be increasing certain direct taxes because you might affect investment if you move too quickly in that direction.” Once private investment picks up that may be a better set of conditions to move towards greater reliance on direct taxes, Dr. Coomaraswamy explained.
He said that due to the debt dynamics, the country can’t live beyond its means (as the case was in the past) and added that the CB and the Ministry of Finance, are gearing for a review by the International Monetary Fund (IMF) this month for the second tranche of the US$ 1.5 billion Extended Fund Facility (EFF). He mentioned two areas that CB will sweat on if there is a significant shortfall of revenue. “One is if the fiscal consolidation trajectory is deviated from there would be more demand pumped into the system and would create certain pressures in terms of inflation as well as leakage into the balance of payments.” A second factor, Dr. Coomaraswamy said is when there are certain targets built into the EFF of the IMF and if the revenue shortfall is significant, that would make it more difficult to achieve those targets.
“Even more than the money involved in the EFF it is the signaling effect that is associated with the EFF. Already we have seen benefits. Part of the reason why the sovereign bond issue went well was because we had a programme.” Both headline and core inflation, measured on a year-on-year basis, edged down in July. The normalisation observed in domestic supply conditions as well as the suspension of the revisions made to certain taxes moderated consumer price inflation. However, the underlying upward trend in inflation, as reflected in annual average price changes, appears to have continued thus far during the year, a CB statement said