Fiscal Management: Lessons from. Koshy Mathai 10 July 2013

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1 Fiscal Management: Lessons from Emerging Market Economies Koshy Mathai 10 July

2 Outline 1. Importance of fiscal discipline 2. Sri Lanka overview 3. Revenue 4. Expenditure 5. Fiscal space and countercylical policy 2

3 1. Importance of fiscal discipline It s Mostly Fiscal : debt is linked to inflation CPI infla ation, average (%) CHL OMN ECU BGR KOR CHN Debt and Inflation IDN KHM ZAR COL PER HKG TWN VNM TUR NPL MEX EST PHL MYS POL PAK URG ARG IND BRA HUN Debt-GDP ratio, average (%) LKA Source: World Economic Outlook (WEO) 3

4 interest rates ds, avg Real long-te erm bond yiel (%) CHL RUS Debt and Interest Rates CHN KOR HKG ZAR IDN TWN TUR MEX POL PHL MYS BRA HUN Debt-GDP ratio, average (%) ARG LKA average for LKA Source: World Economic Outlook (WEO) 4

5 and even growth. Real GDP G rowth, average (% %) Debt and Growth CHN KHM NGA PER IDN TUR, MYS OMN VEN PHL URG RUS ECU COL HKG NPL POL KOR ZAR TWN BRA MEX HUN Debt-GDP ratio, average (%) LKA Source: World Economic Outlook (WEO) 5

6 2. Sri Lanka overview Despite progress, Sri Lanka s fiscal position remains weak Sri Lanka: Fiscal Indicators (% of GDP) Sri Lanka: Fiscal Savings (% of GDP) 35.0% 1% 3% 8.0% 25.0% 6.0% 4.0% 2% 0% 2.0% 15.0% % 1% -2.0% 5.0% -4.0% % -6.0% Fiscal deficit Primary deficit Debt (right axis) Fiscal savings (right axis) Current Expenditure Revenue (incl. Grants) Sources: World Economic Outlook (WEO); Ministry of Finance and Central Bank of Sri Lanka. 6

7 especially when compared to other emerging gmarket economies General governm ment balance, average (% of GDP) General Government Deficit, 2012 (% of GDP) Sources: World Economic Outlook (WEO) and Regional Economic Outlook (REO). 7

8 and this has put pressure on the banks and the real economy Share of Banking Credit Directed to the Gen. Govt., avg. (%) 1% 9.0% 8.0% 70% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% % Sri Lanka: Share of Banking Credit Directed to SOEs (%) Source: International Financial Statistics (IFS) and Central Bank of Sri Lanka. 8

9 Today s favorable debt dynamics won t last forever: better to do fiscal adjustment now. Contribution from Interest-Growth Differential to Debt Dynamics (%) GRC EGY PAK LBN IND ARG SRB VNM ECU LKA IDN BGD MYS PHL KHM BOT POL CHN NPL UKR PRT HUN JPN CHL MEX BRZ COL MLT TUR ZAR RUS THA Source: International Monetary Fund country reports. 9

10 3. Revenue Fiscal adjustment should focus on raising revenue. OMN HUN SRB UKR MLT POL RUS BRZ BOT ARG TUR ECU VEN VNM ZAR JPN COL EGY MYS CHL LBN KOR MEX THA SGP HKG TWN CHN IND IDN PHK LKA KHM PAK NPL BGD Revenue HUN UKR SRB POL MLT BRZ JPN OMN VEN ARG TUR RUS BOT EGY ECU LBN VNM ZAR MYS COL IND MEX LKA TWN THA CHL KOR CHN IDN PHL PAK HKG KHM NPL SGP BGD Expenditure Gen govt revenue, avg (% of GDP) Gen govt expenditure, avg (% of GDP) Source: IMF Government Finance Statistics (GFS) 10

11 But indirect tax rates appear broadly reasonable VAT or sales tax rates (standard, %) Weighted average tariff (%) Source: IMF Regional Economic Outlook for Asia Pacific, April

12 as do direct tax rates (though PIT is on the low side). Corporate income tax rates (max, %) Personal income tax rates (max, %) Source: IMF Regional Economic Outlook for Asia Pacific, April

13 The issue is that tax efficiency i.e., the size of collections for any given rate is very poor CIT Efficiency y( (% GDP collections / rate) Source: IMF Regional Economic Outlook for Asia Pacific, April

14 The emphasis should thus be on strengthened administration and base broadening PIT Efficiency (% GDP collections / rate) VAT Efficiency (% GDP collections / rate) Source: IMF Regional Economic Outlook for Asia Pacific, April

15 Increasing direct tax revenues should be a focus. Trade Selected Asian EMEs: Tax Breakdown (% of GDP) PIT CIT Personal and Corporate Income Tax Receipts (% of GDP) 4.0 Excise VAT 2.0 Average Maximum Sri Lanka KHM LKA CHN NPL BGD PHL IDN IND MNG THA MYS Source: IMF Government Finance Statistics (GFS) 15

16 4. Expenditure Expenditure should be rebalanced, and investment raised. Selected Asian EMEs: Functional Breakdown of Expenditure (% of total) Education Defense Public order Health Economic affairs Average Maximum LKA Source: IMF Government Finance Statistics (GFS). 16

17 5. Fiscal space and countercylical policy Fiscal consolidation will provide room for policy maneuver... Country correlations between cyclical parts of real government spending and real GDP Countercyclical Procyclical Sri Lanka Black: OECD countries Yellow: non-oecd countries Source: 17

18 and could allow Sri Lanka to escape from procyclicality, just as other emerging market economies have done. Country correlations between cyclical parts of real government spending and real GDP Countercyclical Procyclical Sri Lanka Black: OECD countries Yellow: non-oecd countries Source: 18

19 Conclusions 1. Fiscal discipline is critical to macroeconomic success. 2. Sri Lanka s fiscal position remains weak. Debt dynamics are currently favorable, and should be taken advantage of. 3. Revenues need to be boosted, and primarily through base broadening and improved administration. 4. Expenditures should be rebalanced and investment raised. 5. Fiscal consolidation can give Sri Lanka the space to run countercyclical policy dampening, rather than exacerbating, economic volatility. 19

20 THANK YOU 20

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