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Sri Lanka’s fiscal deficit target for 2015 highly unachievable: IMF

May 6, 2015(LBO) – Sri Lanka’s 2015 deficit target will likely be very difficult to reach even with relatively optimistic assumptions regarding revenue gains, International Monetary Fund said in a statement.

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“The fiscal deficit is a key concern for 2015 and the medium-term,” International Monetary Fund said. “Further, in the absence of new measures to create a more durable increase in tax collection, revenues in 2016 will drop as the one-off measures expire, while the permanent increase to recurrent spending from the revised 2015 budget will likely push the deficit higher, raising the level of risk to debt sustainability.” Executive Board of the International Monetary Fund (IMF) concluded the third Post-Program Monitoring (PPM) discussion with Sri Lanka recently. The International Monetary Fund (IMF) earlier urged Sri Lanka to have contingency measures in achieving the revised budget deficit target of 4.4 percent of gross domestic product if planned revenues fails.

Executive Board Assessment – Press statement as follows Directors welcomed Sri Lanka’s recent favorable economic performance, including robust growth, low inflation, and a narrowing of the current account deficit. At the same time, they noted that fiscal risks and reduced external buffers pose challenges, underscoring the need for greater efforts to strengthen the policy framework and reduce vulnerabilities.
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Directors also welcomed the authorities’ commitment to fiscal consolidation. However, they noted with concern that the deficit target under the revised 2015 budget relies to a large extent on one-off revenue measures.

Given the risks associated with the high public debt, Directors urged the authorities to adopt more ambitious measures to contain current expenditure while protecting priority social and high value-added infrastructure spending. They emphasized that a strengthening of the fiscal framework is needed to support consolidation and debt reduction.
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Comprehensive tax policy and administration reforms, including tax expenditure reductions and simplification of the tax system to broaden the revenue base, will be crucial elements in a medium-term fiscal reform strategy.
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Directors noted the resumption of private credit growth following monetary easing in 2013-14. They advised close monitoring of credit and inflation developments, given the potential turn in the credit cycle and long lags in monetary transmission.
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They stressed that it is important to be prepared to act if signs of overheating emerge. Directors welcomed the authorities’ efforts to address weaknesses in the external sector, including plans to establish new swap lines and rebuild external reserve buffers. In this context, they underscored the importance of exchange rate flexibility in protecting international reserves and facilitating external adjustment. Further structural reforms will also be needed to raise productivity and improve the business climate and competitiveness. Directors welcomed the reduction in banks’ nonperforming assets and the authorities’ efforts to bolster supervision and regulation. They highlighted the need for a strong supervisory and clear crisis management framework to be extended to the nonbank sector. They encouraged the authorities to move expeditiously to provide clarity to markets regarding financial sector consolidation.
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Directors agreed to extend post-program monitoring in light of risks and the desirability of maintaining a close policy discussion between the authorities and the Fund.

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Directors looked forward to the new government’s comprehensive economic policy agenda.
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