Sri Lanka budget deficit climbs, economy at USD82.3 billion

Highlights from press conference:
Budget deficit climbs to 7.4% in 2015 vs 5.7% in 2014
– Economy valued at $82.3 billion
– Balance of payments deficit at $1.48 billion in 2015
Credit to private sector 26.5% in Feb vs 25.7% in Jan
– Technical agreement with IMF could be finalized this week

Apr 26, 2016 (LBO) – Sri Lanka’s budget deficit climbed in 2015 while economic growth was recorded at 4.8 percent, the island’s Central Bank said in a review of the economy.

The budget deficit expanded to 7.4 percent in 2015 as the government failed to raise tax revenue and curtail expenditure.

Arjuna Mahendran, governor of the Central Bank, said a wage increase to public servants and arrears from previous years for infrastructure spending was absorbed last year. This contributed to a widened budget deficit.

“The revenue effort did not grow to fund that,” Mahendran said.

Last week the Finance Ministry announced exporters should repatriate proceeds of exports within three months, the latest in measures to support foreign reserves. Mahendran said the government may have had to make a difficult decision there.

“When you look at the invoice value and the money sent back, there is a gap of about 25 to 30 percent. It is an unfortunate situation, the global situation is such that we have to protect our reserves,” he said.

Sri Lanka has sought support from the IMF this year, with around 1 billion dollars to 1.25 billion dollars expected, and Central Bank officials said a technical agreement could be finalized in the next few days.

“We have come to an agreement on a technical level. A technical memorandum can be finalized in a couple of days or this week,” said Nandalal Weerasinghe, the deputy governor of the Central Bank.

Interest rates were held unchanged at the policy meeting held on Tuesday, and Mahendran said recent tightening was still percolating through the economy.

“Demand for credit is still strong. There is evidence that economic activity has picked up substantially,” he said. “Monetary policy is not too tight at the moment. So we are probably still at a fairly accommodative point.”

Credit extended to the private sector by commercial banks rose 26.5 percent in Feb, year-on-year, compared with 25.7 percent growth in Jan, a worrying development for the Central Bank.

This may have prompted the comment that monetary policy was still accommodative.

The Central Bank released the annual report for 2015 at the press conference, which showed that the size of the South Asian economy had expanded to 82.3 billion dollars last year, up from 80 billion dollars in 2014.