Ministry of Finance: In terms of Section 15 of the Fiscal Management (Responsibility) Act, No. 3 of 2003, the Final Budget Position Report, that is, Annual Report 2020 releases to the public.
The Government’s response to the unprecedented nature of the COVID-19 pandemic was cohesive and measured.
The pandemic highlighted the many issues confronting the country including a half decade of low growth and lack of investments and reforms.
While the Government’s first line of focus was to identify and treat the COVID-19 patients together with mitigating the spread of the pandemic to ensure the safety of the citizens from the disease, the response was more broad-based, which included supporting the livelihoods of the people better through the existing social safety networks such as Samurdhi and monthly allowance for elders and cash grants, mostly to the temporarily unemployed due to restrictions on mobility and the provision of essential goods to those quarantining at their homes.
The Government also operated Quarantine Centers in various parts of the country. In discharging the response, the Government effectively used the well tested administrative framework from the District Secretaries to the Grama Niladharis that facilitated the Government to better reach into each households.
The cohesive approach allowed the country which went into a full lockdown in March 2020 to revert to a less restricted environment that even allowed the conduct of the General Election in August 2020.
The legacy of low growth that experienced since 2015 has propelled the Government to revamp the tax structure in its entirety in December 2019, in less than a month into office for revival of the economy. This timely needed tax reforms included the simplification of the tax system through the removal taxes such as Nation Building Tax (NBT), Economic Service Charge (ESC) and Debt Repayment Levy (DRL) and the reduction of the Value Added Tax (VAT) rates from 15 percent to 8 percent except for financial services and Telecommunication Levy (TL) from 15 percent to 11.25 percent while rationalizing corporate and non-corporate tax structure.
Further, a comprehensive tax policy package was announced with the Budget 2021 enabling the introduction of a composite tax of Special Goods and Services Tax (SGST), granting tax exemptions and tax holidays and strengthening tax administration with the infusion of Information Technology. Also, the Government has announced that the tax policy introduced will remain unchanged for at least 5 years providing investors with certainty when making investment decisions.
While 2020 commenced with the expectation of stimulating the economy armed with a new policy structure, it was rendered extraordinary not only due to the pandemic but also because, the year 2020 operated on Vote on Accounts (VOAs) and two authorisations granted to incur expenditure under Article 150(3) of the constitution as the year 2020 had commenced with no approved Budget. The VoAs, in a simplistic sense, only supports the constitution of existing works and is not designed to meet emergencies of any nature, least of all possibly the greatest health emergency of the last century that took shape in March 2020.
The VoAs gave rise to significant operational maneuverability issues in the fiscal space and the pandemic had aggravated the low growth legacy that had prevailed since 2015. The legacies also included Rs. 422.6 billion or 2.8 percent of GDP of unpaid bills due to the construction sector, fertilizer, medical supply, senior citizen interest payment etc., that resulted in these entities defaulting on their dues to the Banks, which is reflected in the high Non Performing Loan (NPL) ratios recorded in 2019. In fact the non-settlement of dues coupled with a high tax regime had a debilitating impact on the Small Medium Enterprises (SMEs).
In this context, the Government acknowledging that the response cannot be postponed, decided to settle the dues to the private sector over 2020. Letters of Undertaking were also issued to the Banks on the back of the unsettled dues to enable the construction firms in particular to be able to access credit from Banks. It is also noted that the Government continued to honour its dues to its creditors both domestic and foreign. Foreign repayments in particular which amounted to USD 2.6 billion including USD 1.0 billion payment on the maturing of the International Sovereign Bonds (ISBs) was met in October 2020.
While the 2019 fiscal deficit was reported to be at 6.5 percent of the GDP, however when adjusted for unpaid and unrecorded domestic expenditure and foreign disbursements in 2019, the fiscal deficit increases to 9.6 percent. The deficit for 2020 was recorded at 11.1 percent, the increase in the deficit is for two reasons including the payment of past dues in 2020 and the recording of expenditures financed by foreign credit facilities amounting to 1.2 percent of the GDP.
Therefore, the adjusted fiscal balance for 2020 is only 11.1 percent of GDP, while when adjusted the fiscal deficit for 2019 increases to 9.6 percent of the GDP. Read in Full