Country Report Sri Lanka March 2011

Outlook for 2011-15: Fiscal policy

The government projects that fiscal inflows will rise from 14.9% of GDP in 2010 to 16.6% by 2013, and forecasts that total expenditure will fall from 22.9% of GDP to 21.3% in the period. This would enable it to achieve a fiscal deficit of 4.8% of GDP by 2013. On these assumptions, the deficit-reduction targets agreed with the IMF would be missed. As our economic growth forecast is less optimistic than the government's, we expect a deficit of 6% of GDP in 2013, narrowing to 4% by 2015. Increased tax collection will be the main means of curbing the deficit. The president hopes that a simplified payment system and lower tax rates will boost inflows, but persistent inefficiencies in collection, widespread tax evasion (by politicians, among others) and the low income base of the population could thwart this aim. Containing current spending will also prove difficult, as the government faces pressure to increase expenditure on the civil service and the armed forces, which constitute important voter bases. Interest costs, which made up almost 35% of recurrent expenditure in 2009, are another area of uncertainty; if inflation exceeds targets, higher interest rates could push up the government's domestic borrowing costs.

© 2011 The Economist lntelligence Unit Ltd. All rights reserved
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