IMF pushes government to make stronger effort to cut budget deficit

Recommends to follow a ’growth and investment-friendly approach’

The International Monetary Fund (IMF) has told the Sri Lanka authorities to “urgently make a stronger effort” to cut the country’s budget deficit.  

Concluding a staff mission in Colombo from February 1 to 5, the IMF mission in a statement expressed its concerns over the country’s widening budget deficit.   

“The government fiscal deficit for 2015 is estimated to have exceeded the original budget target. Based on the budget framework for 2016, IMF staff estimates suggest the fiscal deficit could widen further,” the statement said. 

Sri Lanka’s budget deficit overshot to 7.2 percent of gross domestic product (GDP) in 2015, against a revised target of 6.0 percent. Sri Lanka targets a budget deficit of 5.5 percent this year.
 
“While several measures in the budget (such as elimination of several special purpose levies, and the commitment to eliminate tax exemptions and bolster the efficiency of tax administration) are welcome, the mission highlighted the macro economic and financial risks of a large deficit and the associated need to borrow from domestic and international markets,” the IMF statement said. 

The mission also urged the authorities to take a growth and investment friendly approach to lowering the size of the 2016 budget deficit focusing mainly on measures to raise revenues by broadening the tax base, simplifying and making equitable the tax system, and improving tax administration.
The IMF also said that the public debt had risen to over 74 percent of the GDP by end-2015 while pointing out that capital outflows had intensified and the country’s overall balance of payments had deteriorated. 

“These outflows were accompanied by downward pressure on the rupee and a decline in the Central Bank gross foreign exchange reserves mainly due to short-term capital outflows as experienced in many emerging markets.”

The IMF stressed that these imbalances in the domestic economy were set against an increasingly less benign external environment. 

“Key risks for emerging market and developing economies relate to a weaker global growth environment, market volatility, declining commodity prices, and tighter external financing conditions in the context of global rebalancing.”

Set against such risks, the IMF mission emphasized the urgent need for Sri Lanka to bolster its economic defences.

The mission also acknowledged the positive aspects of the economy. 

“Recent economic performance has been positive in a number of respects. Real GDP growth of 5.2 percent in the first three quarters of 2015 was achieved in the context of continued low inflation. Most sectors have shown positive growth, with particularly robust activity in tourism. 

Benefiting from low oil prices, the external current account balance has also narrowed to an estimated 2 percent of GDP by end-2015, compared with 2.6 percent in 2014,” the statement noted.