Fiscal Strategy

Fiscal Strategy in the Medium Term

The fiscal operations of government are framed by the Fiscal Management (Responsibility) Act, No. 3 of 2003, which provides a legal framework to phase out fiscal deficits and associated debt to support the broad-based development objectives in the Medium Term Macro Fiscal Framework (MTMFF). The government’s major medium term fiscal objectives, among others, are to contain fiscal deficit to 4.0 percent of GDP and debt to GDP ratio to around 75.5 percent by 2025.

In line with the MTMFF, the government’s priorities for 2021-2025 are:

  • 1. Achieving economic growth at 6.0 percent or higher.
  • 2. Maintaining unemployment at less than 4 percent.
  • 3. Retaining inflation not exceeding 5 percent.
  • 4. Increasing revenue to GDP ratio over 14 percent in 2025
  • 5. Allowing the Budget on a sustainable foot by rationalizing unproductive expenditure
  • 6. Containing budget deficit at less than 4 percent of GDP
  • 7. Achieving primary surplus by 2025 and beyond
  • 8. Reducing the Government debt to GDP ratio at 75.5 percent in 2025
  • 9. Ensure a single-digit rate of interest
  • 10. Maintain the stable exchange value of the rupee

The fiscal strategy is designed to address the much needed requirement for growth in an economy. As such, in the background of the longstanding requirement for infrastructure related investments to complement the private sector investments, the public investment will be to maintain an average of over 5.0-6.0 percent of GDP per annum during the period 2021 - 2025.

Public investment has been focused on ensuring connectivity with the 100,000 Km of road projects which includes rural & urban roads and expressways, doubling access to pipe borne water to 75 percent, ensuring the supply of water for agriculture and providing infrastructure for industries, which will have a direct impact on improving productivity in agriculture and industries, whilst improving the quality of living with government taking the role of the investor of first resort. In financing the public investments, almost 75 percent of the public investment will be domestically financed.

The government strategy of rationalizing recurrent expenditure continues into the medium term, from 14.2 percent of GDP in 2021 to at least 12.3 percent of GDP by 2025. Such strategy will include the continuation of the freezing of expenditure on purchasing of vehicles and buildings and other such assets, digitalization of key systems and processes including the rollout of e-procurement and the e-National Identity Card, are expected to facilitate the expenditure rationalization.

In this background, while revenue is expected to be around 9.5 percent of GDP in 2021, it is expected to increase to 14.2 percent of GDP by 2025, in the background of the expected growth potential boosting the tax capacity. To complement such strategy, several measures have already been taken to address the concerns in revenue collection. Revenue enhancement has been accompanied by a comprehensive strategy that interlinks tax policy reforms and revenue administration reforms, which has been dealt with in isolation for many years. This includes the combining of several tax instruments (e.g. increasing the PAL rate and removing the NBT rate), simplification of the system of taxation by reducing the number of taxes to be paid such as NBT, PAYE and WHT. Further, capacity enhancing measures in revenue administration have already commenced including the establishment of the Large Tax Payers Unit (LTU) at IRD, the introduction of risked-based audits, management, governance and human resource development and improvements to the Revenue Administration Management Information System (RAMIS) at IRD. The Sri Lanka Customs (SLC) has already introduced the “Single Window System” and is working on the National Single Window platform. The Integrated Treasury Management Information System (ITMIS) at the Treasury has commenced roll outs in 45 entities and it is expected to further expand to about 200 entities. The tax buoyancy is expected to be improved in the medium term.

Reforms in State Owned Enterprises (SOEs) are also a key aspect of the fiscal strategy. The government’s policy to appoint qualified professionals to the Boards of Management of SOE’s has yielded benefits. Productivity improvements, broad basing of the ownership of non-strategic commercial SOEs are expected to support the fiscal space in reducing expenditure whilst also supporting the non-tax revenue and the non-debt financing of the government expenditure.

However, the impact of COVID-19 remains a key challenge in the implementation of the fiscal strategy, amidst the forecast for the global economy which remains fragile and uncertain posing risks to the expectation and targets of the MTMFF and the Sri Lankan economy.