Transcript 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
Fiscal Performance: 1990-2009
40
– 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
30
% of GDP
• Revenue as a percentage of GDP
has been declining consistently
from the mid-1990s
20
10
0
-10
1990
2000
2009
-20
Deficit
Revenue
Expenditure
Source: Central Bank of Sri Lanka.
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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
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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.)
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Progressivity
Share of Taxes on Income and Expenditure
Composition of Tax Revenue (2009)
100
80
Income
20
08
20
06
20
04
20
02
20
00
19
98
0
19
96
Other
20
19
94
Import duties
40
19
92
Excise tax
60
19
90
VAT
%
Income tax
Production & expenditure
• 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.
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Weaknesses in Expenditure
• Cutting current spending has
proved difficult
Current Spending (2009)
– Salaries, transfers and subsidies
and interest payments on debt
take 1/3 each of govt. revenue
Goods & services
Interest payments
Transfers &
subsidies
• Capital expenditure has borne
brunt of cuts
10
8
% of GDP
– Realized capital expenditure has
consistently been below budgeted
amounts
– Capital spending largely financed
through borrowing
Approved and Realized Capital Spending
6
4
2
0
2000 2001
2002 2003 2004
Realized
2005 2006
2007 2008 2009
Approved
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Impacts on Promoting ‘Inclusive’ Growth
– amongst other causes, lack of
investment in infrastructure has
been identified as a key bottleneck
Education
20
08
20
06
20
04
20
02
20
00
19
98
19
96
19
94
% of GDP
4
3
3
2
2
1
1
0
19
92
• Sri Lanka has also experienced
growing regional ‘imbalances’ in
economic growth and poverty
across sectors/provinces
Expenditure on Education and Health
19
90
• Fiscal constraints have imposed
limits on expenditure in key
sectors such as health and
education
Health
Source: Central Bank of Sri Lanka
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Impact on Macro Stability
Rate of Inflation
25
20
%
• Partly in response to fiscal
developments, Sri Lanka has faced
high and volatile inflation rates
15
10
5
20
08
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
Public Debt
120
100
80
60
40
20
Foreign debt
Domestic debt
20
08
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
0
19
90
– 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
Inflation
% of GDP
• Of even greater concern, is long
run fiscal stability in the face of
growing debt dynamics
0
Total debt
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Impact on Macro Stability
Foreign Debt Dynamics (2006-09)
2006
2007
2008
2009
Concessional
% share
92.7
82.9
84.7
72.2
Non-concessional
% share
2.8
3.4
3.9
4.4
Commercial
% share
4.4
13.7
11.3
23.3
Total foreign debt/exports
%
124.6
127.4
132.2
170.7
Foreign debt service/exports
%
7.1
8.2
13.9
14.6
Source: Central Bank of Sri Lanka, Annual Report, various issues.
• 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
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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
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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
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Thank You
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