Despite a reduction in global inequality, Sri Lanka is among half the countries in the world that have seen a significant rise in inequality, the International Monetary Fund (IMF) said in its latest Fiscal Monitor report launched on Wednesday.
The report also warned that in emerging economies, the pace of fiscal consolidation has slowed to a “standstill” and pointed out the increase in public debt in some countries as particularly concerning, because it coincides with elevated corporate leverage. Sri Lanka is in the company of many advanced economies including Australia, North America and parts of Europe that have seen rising levels of inequality over the last decade.
“If we look at inequality country by country, we realise that most people around the world live in countries where inequality has increased. It is important to emphasise that inequality has increased in the largest countries in the world: China, India and the United States,” Fiscal Affairs Department Director Victor Gaspar told reporters.
In low-income and developing countries (LIDCs), fiscal deficits sharply increased between 2011 and 2016. But they are expected to start steadily declining in 2017.
The composition of spending is expected to improve with consolidation relying less on cutting capital spending and more on controlling current spending, he added.
The report underscored issues that are important for Sri Lanka, which is focused on fiscal consolidation to increase public revenue, reduce deficits and implement structural reforms such as tackling loss-making state-owned enterprises (SOEs), target inflation and implement flexible exchange rates.
The Fiscal Monitor projected Sri Lanka’s general government revenue to hit 14.5% of GDP, a marginal increase from 14.3% in 2016. This is the highest government revenue since 2008. However, with the Inland Revenue Bill and other measures, revenue is expected to rise to 15.4% next year and reach 16.7% by 2020.
Sri Lanka’s debt levels will peak at 79.6% of GDP in 2017 before declining to 77.6% of GDP in 2018 and ending up at 72.1% in 2020. Ratings agencies say Sri Lanka will have to repay an estimated $13.8 billion in debt from 2019 to 2022 with the bunching of debt likely to result in tight policy and moderate growth. General government expenditure is also to rise correspondingly from 19.7% in 2017 to 20.3% of GDP till 2020 and beyond, the report showed.
“One priority is to raise the tax capacity for two reasons. First, mobilising revenue is essential to finance growth-enhancing expenditures. Investments in public infrastructure, education and health are needed to support inclusive growth and address pressing development needs. In LIDCs, tax capacity is too low—one-half of these countries have a tax ratio below 15% of GDP,” Gaspar said.
Higher revenues are necessary to service public debt, he went on to say. When interest as a share of tax revenues increases sharply and becomes too high, this creates vulnerabilities, the report warned. Taxes imposed on broad bases provide a stable but elastic source of revenue that goes together with a robust capacity to repay public debt.
However, the report also calls for redistribution of taxes through aggressive redesign and redistribution policies that would be tailor-made for specific country needs. It also calls for such policies to be periodically evaluated to prove their efficacy.
“Investments in education and health help reduce income inequality over the medium term, address persistent poverty across generations, enhance social mobility and ultimately promote sustainable and inclusive growth. Building human capital is perhaps the best insurance against job insecurity due to rapid technological change,” the report said.