Govt. strongly objects to Fitch claims on economy, targets on track
View(s):The Government has strongly disputed claims by Fitch Ratings which revised the Sri Lanka outlook to ‘negative’ from ‘stable’, saying the administration is continuing its engagement with multi-lateral lending agencies and the authorities are certain that the performance targets for 2019, set under the IMF programme, will be met.
“Revision of the outlook to ‘Negative’ from ‘Stable’ reflects rising risks to debt sustainability from a significant shift in fiscal policy and the potential for roll-back of fiscal and economic reforms in the aftermath of November’s Presidential elections. We believe the departure from the previous revenue-based fiscal consolidation path has created policy uncertainty and increased external financing risk for the sovereign, particularly given the large external debt repayments due in 2020 and beyond,” the rating agency said on Thursday.
Fitch said its preliminary estimates show that the VAT rate change and the scrapping of the nation building tax could alone lower revenue by as much as 2 per cent of GDP in the absence of off-setting measures; VAT accounted for 24 per cent of government revenues in 2018. The authorities have identified offsetting revenue and expenditure measures that they believe would make these tax cuts revenue neutral. Fitch expects these offsetting measures, such as adjustments to excise taxes and spending cuts on non-priority public investment and recurrent expenditure, to mitigate part of the revenue loss from the tax announcement. However, the agency nevertheless expects the deficit to widen by about 1.5 per cent of GDP relative to its previous forecasts.
Fitch revised its budget deficit projection to 6.5 per cent of GDP for 2020 and 6.2 per cent for 2021, which are higher than the authorities’ estimates, from 5 per cent previously in both years.
However the Finance Ministry in a statement said that the recent rating action by Fitch was hastily done without considering facts on the ground.
“Such action is untimely and constitutes a rush to judgement. This rating decision has mainly been based on the hypothesis that Sri Lanka would shift away from the revenue-based fiscal consolidation stance, thereby causing risks to debt sustainability. The authorities would like to stress that such a hypothesis is grossly ill-informed as the Fitch’s estimates on the fiscal impact of the recent tax changes announced by the Government are based on erroneous and linear assumptions. Such a mistakenly estimated revenue impact of the recent tax policy measures has suggested an increase in the budget deficit, hence, an elevated path for government debt over the medium-term. However, what is lacking throughout the Fitch’s analysis is the impact of offsetting measures that the Government is undertaking to meet any revenue loss, and lack of due recognition of the favourable macroeconomic impact that such policies would deliver over the medium-term,” the Ministry said.
First and foremost, the Ministry said it needs to be expressed clearly that the recently announced tax measures aim to stimulate the economy to a speedy recovery from the current economic slowdown in the flagging global economy, while enabling conducive environment to regain business confidence. The recently announced measures will augment the aggregate demand by simplifying the tax system coupled with the reduction/offsetting certain taxes.
“we expect the tax measures announced, will help to boost the economic activities including agriculture, tourism, construction and other services sectors which will provide an impetus to achieve 4.0-4.5 per cent growth in 2020,” it said.
“The impact of the recent policy measures is less significant than portrayed by Fitch due to the following reasons. The Financial VAT which constitutes almost 15 per cent of the VAT revenue remains unchanged at 15 per cent. The potential loss of VAT revenue from cigarettes and liquor which accounts for almost 10 per cent of the VAT revenue has already been eliminated by the upward adjustment of the Excise Duty on cigarettes and liquor, thereby recouping almost 25 per cent of the revenue loss due to the reduction of VAT rate. The impact of removal of NBT from import activities is revenue neutral due to the upward adjustment of Ports and Airports Development Levy (PAL) to 10 per cent from 7.5 per cent. Although the PAYE tax has been removed, it has been replaced by income tax at a higher threshold. While Withholding tax (WHT) has been removed, it has never been a final tax which could be set off against income tax,” the statement said.
The Ministry also said it is important to note that the Government has already taken measures to curtail government expenditure, which would largely complement the impact of revenue reforms.
“In the circumstances, we strongly believe that it is highly untimely for rating agencies to speculate negatively over the performance of the Sri Lankan economy and its outlook without appropriately analysing the effects of all the policy measures introduced by the newly formed government which has been in office merely for one month,” it said.