By: Staff Writer
March 13, Colombo (LNW): Sri Lanka is currently navigating a challenging fiscal landscape, where the government has made significant strides toward fiscal discipline in response to growing economic challenges.
Efforts to control the nation’s fiscal deficit, curb inflation, and stabilize the economy have been central to policy decisions. However, maintaining these fiscal measures while ensuring sustainable growth remains a daunting task.
The government has placed a priority on reducing public debt and managing expenditures, particularly primary spending, which accounts for a large portion of the GDP. As part of these measures, the government has committed to a primary expenditure cap of 13% of GDP, though experts believe this target will require stringent efforts and will test the country’s economic resilience.
In this context, Sri Lanka faces the complex challenge of striking a balance between maintaining fiscal disciplines and investing in critical areas of development, such as infrastructure, education, and healthcare.
While there have been efforts to reduce inefficiencies and unnecessary expenditure, the nation’s fiscal policies continue to be scrutinized by both local and international experts. Dr. Indrajith Coomaraswamy, former Governor of the Central Bank of Sri Lanka, provided insights into the government’s fiscal discipline and emphasized areas for improvement in a recent public lecture.
Sri Lanka’s Declining Tax Revenue and Expenditure Challenges
Former Central Bank Governor, Dr. Indrajith Coomaraswamy, lauded the government’s commitment to fiscal discipline but highlighted significant challenges in maintaining a primary expenditure cap of 13% of GDP.
Speaking at the 75th Anniversary public lecture of the CBSL, he cautioned that adhering to this target would be a formidable challenge given Sri Lanka’s current fiscal position.
Dr. Coomaraswamy pointed to the country’s declining tax-to-GDP ratio, which has dropped significantly from over 20% in the 1990s to a mere 7.4% in 2022.
This decline, he argued, was primarily due to substantial tax cuts in 2019 and tax holidays granted to emerging industries like apparel and tourism.
While these measures were intended to stimulate growth, they failed to compensate for the revenue losses from traditional sectors such as tea, rubber, and coconut, resulting in a reduction of overall tax revenue.
The former Governor stressed that the focus should be on increasing tax revenues rather than cutting essential public expenditures.
He emphasized that once companies become profitable, they must contribute taxes, irrespective of the sector they belong to.
Furthermore, he advocated for modernizing Sri Lanka’s tax administration, specifically calling for the full implementation of digital systems like the Revenue Administration Management Information System (RAMIS), which could improve transparency and streamline revenue collection processes.
Dr. Coomaraswamy argued that these reforms would significantly enhance compliance and reduce inefficiencies in the system.
In addition to the tax issues, Dr. Coomaraswamy expressed concern over the country’s declining export sector, noting that exports as a percentage of GDP have fallen from 35% in 2000 to below 20% today. He attributed this to the failure of successive governments to execute export-led growth strategies effectively.
Moreover, Sri Lanka’s intermediate exports remain low, representing less than 5% of total exports, compared to over 50% in countries like Malaysia and Vietnam.
The former Governor also warned against Sri Lanka’s protectionist policies, which have hindered foreign direct investment (FDI) and prevented the country from fully integrating into global supply chains.
He pointed out that the country’s distorted tariff structure and additional para-tariffs, such as PAL and CESS, have rendered Sri Lanka uncompetitive in the global market.
