Weak fiscal position, low revenue generation pose key downside risks:stanchart

Weak fiscal position and low revenue generation have been cited as primary downside risks to the overall Sri Lankan economy by a recent report issued by the Standard Chartered.

The report cited continuing weakness in Sri Lanka’s fiscal position as a result of high recurrent expenditure and low revenue generation as the primary downside risk to the country’s overall performance alongside negative market sentiment caused by the absence of a new International Monetary Fund programme and the fiscal drag created by heavy debts in state owned enterprises (SOE).

Standard Chartered went on to forecast a fiscal deficit of 6.5% of GDP in 2013.

“The government targets reducing the fiscal deficit to 4.5% by 2015 (7.0% in 2012F), led by tax reforms. The government’s 5.8% fiscal deficit target for 2013 is based on a 19.2% increase in revenue, which will be difficult to achieve, in our view”

“Sri Lanka’s fiscal position has historically been weak due to a narrow tax base, large interest payments, extensive subsidies and a bloated public sector. Although fiscal consolidation is underway, little has been done to address structural shortfalls in public finances,” the report noted.

Sri Lanka’s tax/GDP ratio stands at 12.4% whilst interest payments account for 25% of government expenditure. Government subsidies account for 15% of expenditure whilst wages towards civil servants account for a further 24% of expenditure.

“The poor performance of the state oil and electricity companies will continue to act as a fiscal drag. Moreover, in the absence of a new IMF programme, the government needs to maintain strict fiscal discipline.

Combined losses of the state-owned Ceylon Petroleum Corporation and the Ceylon Electricity Board accounted for 1.75% of GDP in 2011.