Annual Report 2010 - Ministry of Finance and Planning

Ministry of Finance and Planning Sri Lanka > Annual Report 2010by about 7 percent to Rs. 91 billionreflecting the full impact of around21,000 retirees in 2009 and the partialimpact of 16,366 new retirees in2010. The decline in defence relatedprocurement also helped the reductionof recurrent expenditure. Accordingly,the non interest recurrent expendituredeclined to 10.4 percent in 2010 from11.8 percent in 2009.Public InvestmentPublic investment, which was at 6.4percent of GDP in 2010, reflectedthe sustained effort to maintain suchinvestment over 6 percent of GDPduring the post 2005 period despitemany challenges faced in fiscalmanagement. Accordingly, both megainfrastructure development projectsat national level and the developmentof infrastructure in the emergingregions were continued at a higherpace. This reflected a high level ofcommitment of the government inresolving infrastructure bottlenecks inthe country to facilitate private sectorinvestment to achieve a sustainablehigh economic growth and reduceeconomic disparity among the regions.The public investment programmeincluded the development of roads,highways, bridges, ports, airports,irrigation, water supply & sanitation,power generation as well as ruralinfrastructure development projectsgiving priority to several accessroads, electricity distribution network,community water supply and minorirrigations. In particular, the completionof the phase I of the Hambantota PortDevelopment Project in November 2010,commissioning of the Norochcholai CoalPower Plant in March 2011, as well asthe Southern Highway Project and 150MW Upper Kothmale Hydro Power PlantProject which are to be commissionedin the middle of 2011, are importantmilestones in the public investmentprogramme.Budget DeficitThe budget deficit of Rs. 446 billionin 2010 was financed through bothdomestic and foreign funds. Theimportant feature of the domesticfinancing front was the net repaymentof Rs. 1.9 billion made by thegovernment to the banking systemcompared to the net borrowing of Rs.49 billion in 2009 from the bankingsystem. This helped the banking systemto accommodate the growing demandfor credit from the private sector.Government DebtThe government debt to GDP ratioresumed its declining trend in 2010from the high level of 105.6 percentrecorded in 2002 thereby correctingthe aberration experienced in 2009.Accordingly, the debt to GDP ratiodeclined to 81.9 percent in 2010reflecting both the containment of thebudget deficit at 8 percent of GDP aswell as the higher nominal growth inGDP. This was mainly reflected in theoutstanding domestic debt, whichdeclined to 45.8 percent of GDP from49.8 percent in the previous year. Ofthe total domestic debt, about 76percent was with medium to long termmaturity periods. About 63 percent ofthe outstanding government foreigndebt was on concessional terms andconditions.Medium Term DirectionThe government is committed tostrengthen the fiscal consolidationprocess further in the medium term.As announced in the 2011 Budgetspeech and accompanied reportunder the Fiscal Management(Responsibility) Act (FMRA), thegovernment is committed to restoredeficit plans by reducing the deficitto 5 percent by 2012 through thegeneration of a revenue surplus. Thebudget 2011 includes far reachingtax policy reforms to improve thefiscal performance to strengthen themacroeconomic stability towardsachieving a high and sustainableeconomic growth in the medium-term,based on the policies and strategies inthe development policy framework ofthe government.Tax Reforms inBudget 2011Budget 2011, presented in November2010, includes major reform initiativesto correct the long felt deficienciesin the country’s tax system. Theongoing reforms have been designedto address the fundamental changestowards a simple and broad-basedtax system. They are based on anextensive consultative process amongthe stakeholders and broad guidelinesof the Presidential Commission onTaxation.The tax reforms are beingimplemented with a comprehensivemedium-term view of having a simpleVAT/Nation Building Tax with a widerbase; well-focused excise tax system;customs duties, Cess and SpecialCommodity Levy for local economysafeguards and consumer protection;simple personal income tax systemcomparable with the region; efficienttax administration process based oncompliance promotion and targetedtaxes to avoid complexities in VATrefunds. The new system also includesa committee for the interpretationof the laws at the Department ofInland Revenue, Independent TaxAppeal Commission headed by aretired Supreme Court Judge and anInvestment Fund Account which iscreated by using the 8 percent savingsfrom the VAT on financial servicesand 5 percent of the reduction of themaximum corporate income tax ratefor the provision of medium to longtermloans for agriculture, industryand SME related activities.147