Sri Lanka’s government revenue as a share of GDP is lower than many peers, while the government debt-to-GDP ratio is much higher, Moody’s Investors Service said in a statement.
Debt-to-GDP ratio in Ethiopia, Uganda and Ghana among other countries is lower than Sri Lanka even though revenue-to-GDP ratio in these countries higher than Sri Lanka.
Moody’s Investors Service said Sri Lanka’s very large debt burden and weak debt affordability weighing on country’s sovereign credit profile.
Moody’s Investors Service, however, said new Inland Revenue Act which took effect on 1 April, will rationalize the existing income tax structure and help broaden the income tax base by removing exemptions, a credit positive.
The government expects the removal of tax exemptions and the introduction of new taxes, including a capital gains tax, to increase government revenue by 0.5 percent of GDP in 2019 following its first full year of implementation.
“We consider this target to be achievable. In addition, tax revenue will be strengthened by improved administration through the rollout of Sri Lanka’s new technology systems and value-added tax compliance strategies,” Moody’s said.
“We expect that these measures will strengthen Sri Lanka’s fiscal metrics, which are weak compared with many similarly rated sovereigns.”
Moody’s Investors Service said they expect government revenue to rise 0.4 percentage point to 15.2 percent of GDP in 2018 and increase a further 0.8 percentage point to 16 percent of GDP in 2019.
They, however, expect government expenditures to remain flat at 20 percent of GDP and forecast the fiscal deficit to narrow to 4.8 percent of GDP this year and shrink to 4.0 percent of GDP in 2019, from 5.2 percent in 2017.
Along with the Inland Revenue Act, Sri Lanka will introduce a new Taxpayer Identification Number system.
“Such initiatives will help to raise tax compliance, broaden the current narrow tax base and improve the composition of the revenue base by raising the share of direct taxes,”
“We expect the cumulative revenue gains from the IR Act and other revenue-enhancing measures, along with improved tax administration, to gradually reduce debt burden to about 74% by 2021 from 79.3% of GDP in 2017.”
Still, government debt will remain well above the median of about 55 percent of GDP for B-rated sovereigns and will remain high for an economy of Sri Lanka’s size and income level.
Moody’s Investors Service said a sustainable rebound in real GDP growth will be essential to help support future revenue gains.
“We expect real GDP to grow about 4.7% in 2018, up from 3.1% in 2017, which was one of the weakest years on record because bad weather hindered agricultural output,”
“As weather conditions normalize, a rebound in agriculture production and exports will boost growth this year.”
Moody’s Investors Service said stronger growth and higher revenue are key for Sri Lanka to sustainably reduce its government deficit to its target of 3.5% of GDP by 2020.
Sri Lanka is currently in an International Monetary Fund (IMF) program in which reforms that contribute to fiscal consolidation are central to meeting IMF program targets.