Local borrowing surges as new tax bills delayed

Reuters: Sri Lanka’s local borrowing through Government bonds has surged, surpassing the total figure for all of last year, data showed on Friday, as the new Government struggles to pass crucial tax bills announced in January to finance some populist measures.

The Government has borrowed Rs. 378.3 billion ($2.28 billion) through Treasury bills and bonds so far this year until Wednesday, higher than the Rs. 259.8 billion it borrowed in 2014, the latest central bank data showed.President Maithripala Sirisena’s Government, after coming to power following an 8 January presidential election, revised down this year’s budget deficit to 4.4% of Gross Domestic Product in 2015 from an original 4.6% by reducing spending on infrastructure projects.

However, the Government in the budget also announced a raft of populist policy measures as promised in the election campaign at an additional cost of Rs. 95.5 billion.

It also announced plans to impose new taxes worth Rs. 80.3 billion to finance the concessions promised in the run up to the election including salary hikes to state-sector employees and pensioners.

However, the Government is unable to pass some key one-off retrospective taxes as it lacks a majority in Parliament.

“The lack of additional tax revenue as planned has resulted in more borrowing from the local market,” Danushka Samarasinghe, Head of Research at Softlogic Stockbrokers, said.

Finance Minister Ravi Karunanayake last week told reporters that the minority Government “is being held hostage by a majority Opposition”.

The new Government is expected to face a Parliamentary election soon. Finance Ministry officials have said some of the populist measures have already been implemented even without the additional revenue, mainly from existing taxes and debt.

The Central Bank in a surprise move cut the key monetary policy rates by 50 basis points in April, a move economists expect will reduce the new Government’s interest cost.

The Parliament rejected Karunanayake’s proposal on 7 April to increase the Government borrowing limit by Rs. 400 billion to bridge the revenue shortfall.