Sri Lankan authorities reiterate that the recent rating action by Fitch Ratings to revise Sri Lanka’s Outlook to ‘Negative’ has been hastily done without considering facts on the ground.
The Finance Ministry said that such action is untimely and constitutes a rush to judgement.
This rating decision has mainly been based on the hypothesis that Sri Lanka would shift away from the revenue-based fiscal consolidation stance, thereby causing risks to debt sustainability.
The authorities would like to stress that such a hypothesis is grossly ill-informed as the Fitch’s estimates on the fiscal impact of the recent tax changes announced by the Government are based on erroneous and linear assumptions.
Such a mistakenly estimated revenue impact of the recent tax policy measures has suggested an increase in the budget deficit, hence, an elevated path for government debt over the medium-term.
However, what is lacking throughout the Fitch’s analysis is the impact of offsetting measures that the Government is undertaking to meet any revenue loss, and lack of due recognition of the favorable macroeconomic impact that such policies would deliver over the medium-term.
The Finance Ministry said that the recently announced tax measures aim to stimulate the economy to a speedy recovery from the current economic slowdown in the flagging global economy, while enabling conducive environment to regain business confidence.
The recently announced measures will augment the aggregate demand by simplifying the tax system coupled with the reduction/offsetting certain taxes.
The Government says the announcement of such tax changes was done after a careful assessment of the consequences, while crafting the offsetting measures so that Government’s commitment to the fiscal consolidation process is uncompromised and the medium-term macro-fiscal framework remains intact.
It is noted that the Government attaches the highest priority to meeting debt service obligations in order to preserve Sri Lanka’s unblemished track record of duly servicing of government debt.