Sri Lanka Brief
FeaturesFiscal fumble!

Fiscal fumble!

  • Govt. misses revenue target by Rs. 51.2 b or 14% up to April; expenditure overshot by Rs. 16 b or 2.5%
  • Year on Year dip in revenue is 4% expenditure up by 7%
  • Total dip in revenue from import base taxes was Rs. 21 b
  • Public investment expenditure up by 21.7% to Rs. 196 b
  • Budget deficit at 4% up to April and annualised figure swells to 11.8%
  • Treasury confident of containing fiscal deficit at 5.8% by year end as announced in 2013 Budget

The report card of the Government’s fiscal management so far appears to be under the weather with revenue and expenditure goals going off-track but the Treasury has expressed confidence in finishing the year with the originally announced Budget deficit of 5.8%.

“Overall revenue performance continued to remain mixed,” the Finance Ministry said in the statutory Mid Year Fiscal Position Report released yesterday. Total state revenue for the first four months of 2013 was Rs. 314 billion, down by 4% or Rs. 12.6 billion in comparison to the corresponding period of last year. The Finance Ministry said the total decline in revenue from import base taxes amounted to Rs. 21 billion in the first four months.

The original revenue target by April as per Budget 2013 presented in November was Rs. 365.2 billion, reflecting a shortfall of Rs. 51.2 billion or 14%. On the other hand total expenditure during January to April 2013 was Rs. 658.4 billion, up by Rs. 16.3 billion or 2.5% against the target and up by Rs. 44 billion or 7% in comparison to the corresponding period of last year.

The Finance Ministry report also provided provisional data for the first half of 2013 which also reflects a 3% dip in revenue to Rs. 509.4 billion in comparison to a year earlier and a 3.3% increase in expenditure to Rs. 861.6 billion. The report however didn’t indicate the 1H target set as per Budget 2013.

The Budget deficit up to April as well as the 1H was 4% or Rs. 353.5 billion by April and Rs. 352.2 billion by 1H. The deficit up to April includes bank borrowings of Rs. 173 billion, non-bank borrowings of Rs. 65 billion and foreign investments in Treasuries of Rs. 64 billion.

On an annualised basis the deficit was 11.8% of GDP. The full-year deficit target set in Budget 2013 was 5.8%.
However, the Finance Ministry said the continued improvement in income taxation, full impact of VAT coverage extension to retail trade, gradual recovery from the impact of adjustment measures, improvement in banking liquidity and lower interest rates are expected to improve Government revenue performance during the second half.

“This turnaround together with a closer monitoring of public expenditure management within the overall budgetary ceilings is expected to be conducive to maintain fiscal deficit at 5.8% as announced in Budget 2013,” the Mid Year Fiscal Position Report said.

It also said the improvement in the financial position due to the full capacity operation of hydropower during first half of 2013 and the electricity tariff revisions are expected to reduce the operational losses of the Ceylon Electricity Board (CEB). The benefits of administrated price revisions with respect to petroleum products together with relatively modest movements in international oil prices and exchange rates are expected to reduce the operational losses of the Ceylon Petroleum Corporation (CPC).

“These positive developments are conducive to improve the overall liquidity in the economy, expand private sector lending in support economic activities and strengthen fiscal performance during the second half of the year,” the Finance Ministry said.

Detailing revenue performance, it said income taxation generated Rs. 62,225 million in the first four months in comparison to Rs. 54,485 million during the corresponding months of the previous year showed a buoyant growth of 14.2%, reflecting a favourable consolidation of the impact of 2011 tax reforms which aims at lower rates and a broad base.

Tax revenue from wage income (PAYE) increased by 43.5% despite lower rate structure and higher threshold inbuilt in the post 2010 tax system due to higher wage income and employment liable to such taxes, collection of such tax at source as final tax and improved compliance from employers. Tax on interest imposed at source as final tax too recorded a higher growth of 51.2% reflecting the increase in deposit and yield rates on Government securities and growth in deposit base in the banking and financial system, as well as higher turnover of Government securities.

Corporate and non-corporate income and profit tax too increased by 7.9% due to a gradual completion of tax holiday periods by many companies and buoyant performance of banking and financial institutions, food and beverage, manufacturing and tourism and services despite the impact of continued slowdown in credit growth and the business of motor vehicles and financial leasing activities.

Tax revenue from indirect taxes on domestic activities also showed a positive movement. Tax revenue from VAT on domestic consumption at Rs. 42,757 million registered an increase of 11.3%. Reflecting the system improvement under single rate VAT of 12% as against dual rate structure of 12% and 20% prevented prior to 2011. Similarly, Nation Building Tax (NBT) on domestic activities increased by 10.5%. Special Commodity Levy (SCL) collected at the point of imports showed a 39% increase reflecting a higher tax rate imposed in support of maintaining a stable remunerative domestic producer margins in agriculture commodities.

On the negative side, the Finance Ministry said that revenue performance continued to suffer due to a decline in motor vehicle imports, cigarettes and liquor volumes. Consequently, VAT revenue from imports declined by 11.9% and NBT revenue from imports by 16.4%, the decline in Excise (Special) Provision Tax primarily imposed on motor vehicles was 36.9%. The contraction in imports of motor vehicles, home appliances, textiles, chemical products, wheat and maize and continued exemption of several items in support of exports Ports and Airports Development Levy also declined substantially by 23.8%. The total decline in revenue from import base taxes amounted to Rs. 21 billion in the first four months. The decline is a reflection of the impact of corrective measures adopted from February/March 2012 to reduce imports and stabilise Balance of Payments.

Total non-tax revenue during the first four months of 2013 declined by 16.9% to Rs. 24,162 million. The Finance Ministry said non-tax revenue from fees and charges and social security contributions from public servants showed strong positive growth while profit transfers from the Central Bank of Sri Lanka (CBSL), State Owned Business Enterprises (SOBEs) and interest and rent income showed moderation or a decline.

Government expenditure consisting of current expenditure of Rs. 471,380 million and public investment expenditure of Rs. 186,991 million totalled Rs. 658,371 million during January-April 2013 in comparison to Rs. 614,259million during the corresponding period of 2012. The current expenditure increased by 2.3% while public investment expenditure rose by 21.7%.

The total Government expenditure in excess of Government revenue produced an overall deficit of Rs. 343 billion or 3.9% of GDP during January-April 2013 in comparison to Rs. 285 billion or 3.8% in the corresponding period of 2012.

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