• Says tax cuts have made SL one of the countries with the lowest income-to-GDP ratios in the world
• SL’s revenue to GDP ratio fell to 9.1% in 2020 and 8.7% in 2021
• Says SL must implement tough economic reforms to get out of current crisis
• points out that failure to implement the required policy at this stage would be very costly

The Ministry of Finance admitted last week that the sweeping tax cuts introduced by the government of President Gotabaya Rajapaksa were the main reason for the drying up of the state coffers and the biggest contributor to the current economic malaise facing the country. is confronted.

“Government revenue has declined sharply over the past two years for various reasons, including the economic slowdown caused by the COVID-19 pandemic, import restrictions imposed to ease the pressure from the external sector, but above all, due to from the ultra-low tax regime introduced in late 2019 and the easing measures related to COVID-19 in early 2020,” the Ministry of Finance said in a briefing note.

“Even before these tax cuts, Sri Lanka was a country with one of the lowest income-to-GDP ratios in the world, and the tax cuts have moved Sri Lanka closer to the bottom of that list,” a- he added.

The revenue to GDP ratio in 2021 is estimated to have fallen to 8.7% from 9.1% in 2020. However, the country’s budget deficit as a percentage of GDP widened to 11.1% in 2020 and 12, 2% in 2021, resulting in macroeconomic imbalances.

With deteriorating fiscal and macroeconomic conditions, Sri Lanka’s credit ratings have been downgraded successively, which has significantly limited the country’s access to international financial markets.
This led the government to depend on domestic borrowing to finance the growing budget deficit. Domestic financing comes largely from the banking system.

Within the banking system, central bank funding, loosely referred to as money printing, has reached an alarming level, leading to an unprecedented deterioration in the central bank’s balance sheet and causing inflationary and balance pressures. payments.

To get the misguided economy back on track, the Finance Ministry said Sri Lanka needed revenue-based fiscal consolidation and identified the government’s decision to seek assistance from the International Monetary Fund (IMF) as a starting point and catalyst for implementing difficult economic reforms. Sri Lanka has been tarrying for decades. “Cost-based pricing for utilities and the energy sector will need to be implemented, with social safety nets to support vulnerable segments of society. Continued losses from related public enterprises (SOBEs) are increasing the burden on the fiscal sector through contingent liabilities and revenue losses, while creating significant financial pressures on the financial sector.

Given the country’s financial situation, divestment from underutilized and non-strategic state assets, including unproductive state-owned enterprises, will also be necessary,” the briefing note states.
The Ministry of Finance has warned that failure to implement the required policy reforms at this critical stage will be very costly.

Finance Minister Ali Sabry has already said that all taxes will soon be raised to at least pre-2019 levels, but has indicated that the increase in value added tax (VAT) may be delayed. However, in implementing these tough reforms, the Ministry of Finance noted that the country and its citizens will have to go through a difficult period.
“Given tighter fiscal and monetary conditions, as well as more market-based pricing, strong social safety nets need to be designed and implemented,” the briefing note said.