July 21, 2009 (LBO) – Sri Lanka is planning a budget deficit of 7.0 percent of its economy under a plan agreed with the International Monetary Fund, which will help improve the country’s rating and open the way for foreign financing, a top official said.
A 7.0 percent target is tight for Sri Lanka and past experience has shown that the country can survive a slippage unless it resorts to central bank credit to finance the gap.
“The IMF staff supports this program, specifically the government’s goals of rebuilding reserves, reducing the fiscal deficit to a sustainable level, and strengthening the financial sector,” he said in a statement.
A responsible government budget is key to economic stability. If the government spends more than it gets and prints money (gets central bank credit) to make up for shortfalls the rupee falls quickly and later inflation also picks up.
A dip into central bank credit last week, which drove domestic interbank liquidity steeply up, sent shivers down the spines of economy watchers last week, showing the importance of tighter budgets.
Cabraal said Sri Lanka was planning 4.0 to 5.0 percent average inflation by end-2009 and “slightly over” 5.0 percent by the year end under the IMF program.