Sri Lanka Targets Narrowest Budget Gap Since 1977 as Taxes Rise

Sri Lanka pledged to narrow its fiscal deficit to the least in more than three decades after raising taxes and projecting an increase in revenue on faster economic growth.

The island will aim for a shortfall of 5.8 percent of gross domestic product in 2013, compared with 6.2 percent this year, President Mahinda Rajapaksa said in his budget speech in Colombo yesterday. He broadened the application of value added tax and nation building tax to larger supermarkets and raised duties on liquor imports.

The central bank signaled in a report before the speech that cooling inflation may boost scope to ease monetary policy, predicting economic expansion will quicken to 7.5 percent in 2013. The nation raised interest rates earlier in 2012 and let the rupee drop to tackle a trade deficit that pressured foreign reserves, part of a policy revamp that restrained the economy.

“Higher taxes and better tax collection from faster growth seems to be the strategy to narrow the deficit,” said Sanjeewa Fernando, an analyst at CT Smith Stockbrokers in Colombo. “In the absence of fiscal stimulus, monetary policy will have to ensure that growth targets are met.”

Rajapaksa said the island is reaping the benefits of peace, helping to lower debt levels and unemployment, adding investment needs to rise. Sri Lanka’s 26-year civil war ended in 2009.

The Central Bank of Sri Lanka said in its report that “an easing of both fiscal and monetary policy measures adopted domestically to address issues in certain sectors” is expected in 2013.

Slowing Inflation

The bank forecast inflation will slow to “mid-single digit levels” next year, after reaching almost 10 percent in July following the slide in the rupee.

The currency is down about 12 percent against the dollar in 2012, raising import costs. The benchmark Colombo All-Share Index (CSEALL) has slumped more than 8 percent in the same period.

The monetary authority left interest rates unchanged for a sixth month on Oct. 23 to damp inflation. There will be “some space to loosen” policy to aid economic growth next year if inflation is under control, Governor Ajith Nivard Cabraal said after that decision.

Consumer prices rose 8.9 percent in October from a year earlier, the slowest pace in five months. Growth in the $59 billion economy exceeded 8 percent last year.

Total government spending in 2013 will increase to 1.79 trillion rupees ($13.7 billion), from 1.54 trillion rupees this year, according to budget documents. Tax revenue was projected at 1.13 trillion rupees, from 921 billion rupees.

The targeted fiscal shortfall of 5.8 percent of GDP next year would be the least since 4.5 percent in 1977.

Sri Lanka’s trade deficit in the nine months through September was $6.78 billion. Foreign reserves stood at $7.05 billion by the end of September. The International Monetary Fund has loaned the nation $2.6 billion to help rebuild them.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net;

To contact the editors responsible for this story: Hari Govind at hgovind@bloomberg.net:

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