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Sri Lanka’s struggle to increase tax intake will exacerbate: Moody’s

13 Oct 2020

The coronavirus crisis will lead to long-lasting revenue losses for emerging market (EM) economies, with those already struggling to increase their tax intake before the pandemic, such as Ethiopia (B2 Negative), Sri Lanka (Caa1 Stable), and Pakistan (B3 Stable), facing additional hurdles, Moody’s Investors Service said in a report yesterday (12). “In Sri Lanka, despite the implementation of the Inland Revenue Act in 2018 and other reforms to improve overall tax administration, revenue declined to 12.7% of GDP in 2019, from 14.1% in 2016 and a far cry from the 2019 budget target of close to 16%,” it said. It pointed out that the ability of EM governments to implement and enforce effective revenue-raising measures in response will be an important credit driver over the next few years because of their sizeable spending pressures and the subdued recovery in the global economy expected next year. “The coronavirus crisis has underlined the importance of revenue generation for emerging market governments,” said Moody’s Vice President – Senior Credit Officer and author of the report Lucie Villa. “For EMs, any fall in revenue is particularly important for creditworthiness because their government spending needs – social, infrastructure, and debt financing – are often more urgent than for advanced economies and they have a generally narrower revenue base.” With the support of development finance institutions, EM governments will look to implement or resume tax-raising measures. However, only a few governments have successfully raised revenue much faster than GDP growth over the last 10 years, Moody’s said.


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