July 29, 2016 (LBO) – Sri Lanka’s 50 basis point rate hike on Thursday was partly due to fiscal slippage arising from a delay in hiking the value added tax, Governor Indrajit Coomaraswamy said.
Sri Lanka budgeted for a two percentage points of GDP reduction in the budget deficit this year, but delays to a VAT increase may affect that target, he said.
“Fiscal performance was very good (so far this year), but the delays that have been caused by some of the court cases related to the VAT adjustments means there will be some disruption to revenue collection,” Coomaraswamy said.
The government is expected to get Parliamentary approval for a VAT increase on 11 August, after initially expecting this on July 23rd.
“When there is a slippage in fiscal policy, clearly monetary policy has to lean against it,” he said.
Coomaraswamy added that continued high credit growth to the private sector of 28 percent in May, which is likely to continue in June, and CCPI average inflation running at 4.8 percent, also prompted the rate hike.
“So we felt we needed to take some action,” he said, adding a possible rate hike in the U.S. due to a strengthening of their economy would support the decision.