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Sri Lanka FinMin says government aims to reduce budget to 3.5 percent of GDP by 2019

Sri Lanka's Finance Minister Ravi Karunanayake.
S. Kodikara | AFP | Getty Images
Sri Lanka's Finance Minister Ravi Karunanayake.

Sri Lanka will strive to tighten its belt and maintain policy consistency to improve its debt rating and help make capital Colombo a global financial center, the country's finance minister told CNBC on Monday.

The new administration will raise value-added tax (VAT) and reintroduce capital gains taxes as it seeks to improve Sri Lanka's finance outlook, Ravi Karunanayake told CNBC's "Capital Connection."

"We want to tax the top end of [the consumer], which basically consumes, rather than the downtrodden," Karunanayake said, calling it a necessary measure to achieve fiscal consolidation.

"Imposing new taxes is a hard-sell, but what more can you do?"

The finance minister added his administration's long term target is to reduce Sri Lanka's budget deficit to 3.5 percent of gross domestic product (GDP) by 2019-2020. Government data showed Sri Lanka's budget deficit was at 6 percent of GDP for 2015.

According to Reuters, Prime Minister Ranil Wickremesinghe told lawmakers VAT would be hiked to 15 percent from 11 percent, while capital gains will be taxed for the first time since 1987.

Karunanayake said the current administration, which came into power last year, inherited plenty of problems from the previous government that have seen Sri Lanka's credit rating take a hit.

Karunanayake called the rating cuts "absolutely unfair," adding credit assessors had raised Sri Lanka's debt ratings under the previous government.

In late February, Fitch Ratings downgraded Sri Lanka's issuer default ratings (IDRs) to B+ from BB- with a negative outlook.

Fitch cited increasing refinancing risks, significant debt maturities, a decline in foreign exchange reserves and weaker public finances behind its decision to cut Sri Lanka's debt rating.

Standard & Poor's recently affirmed its B+ rating and cut Sri Lanka's outlook to negative from stable. Moody's currently has a B1 rating with a stable outlook.

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