'On average, emerging govts will lose revenue worth 2.1% points of GDP in 2020'

Emerging market Sovereigns, including Sri Lanka, that were struggling to increase tax intake before the COVID-19 pandemic will face additional hurdles, Moody’s Investors Service said in a report issued on Monday.

The remarks were made as part of an assessment of how emerging market (EM) sovereigns will suffer long-lasting revenue losses due to the coronavirus crisis, with governments’ ability to implement and enforce effective revenue-raising measures set to be a key credit driver over the coming years.

According to Moody’s, on average, EM governments will lose revenue worth 2.1 percentage points of GDP in 2020, above the 1.0 pp loss in Advanced Economies (AEs).

"Sovereigns already struggling to increase their tax intake before the pandemic, like Pakistan, Tanzania, Ethiopia, Sri Lanka, and Bangladesh, will face additional hurdles."

"Sovereigns with a preexisting and established focus on raising taxes from low levels like Costa Rica, or past episodes of effective tax policy changes like Georgia and Montenegro, will likely fare better," it said.

Almost all EMs will record budget deficits this year and face constraints in cutting spending amid the pandemic, amplifying the importance of revenue generation. EM fiscal revenue will stay below pre-crisis levels amid a slow and halting global recovery. 

“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%," Moody’s said.

“The coronavirus crisis has underlined the importance of revenue generation for emerging market governments,” said Lucie Villa, a Moody’s Vice President – Senior Credit Officer and the report’s author. “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.