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SL told to negotiate more realistic budget deficit target with IMF

21 February 2019 10:50 am - 0     - {{hitsCtrl.values.hits}}

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From left: Standard Chartered ASEAN and South Asia FX Research Head Divya Devesh, South Asia Economist Sourav Anand and Global Chief Economist David Mann
Pic by Nisal Baduge

 

By Indika Sakalasooriya
The Sri Lankan government and International Monetary Fund (IMF) may need to negotiate a more realistic and acceptable budget deficit target that allows the economy to grow at a higher pace, according to Standard Chartered Bank’s global research team.


The government is currently holding discussions with a visiting IMF team to restart the Extended Fund Facility (EFF), which was halted due to the political uncertainty in the latter part of last year.


The US $ 1.5 billion EFF arrangement Sri Lanka struck with the IMF in 2016 included a condition for the country to cut its budget deficit to 3.5 percent of gross domestic product (GDP) by 2020.


Sri Lanka is targeting a budget deficit of 4.8 percent of GDP in 2018, after overshooting an ambitious 4.6 percent target in 2017. 


“The IMF forecast is 3.5 percent of GDP by 2020. In our base case, that’s not going to happen.

It’s a negotiation the government and IMF may be undertaking right now. They could come out with a number that is more acceptable and realistic, related to growth,” Standard Chartered South Asia Economist Sourav Anand told reporters in Colombo, yesterday. 


“Boosting growth at this point of time is also a very important parameter because at the end of the day, you measure debt sustainability as debt to GDP. So, if the GDP is not growing, that is a problem,” he added.


Anand stressed that Sri Lanka doesn’t have fiscal space to widen the budget deficit without putting debt sustainability in jeopardy.


He said 2019 is going to be a “slightly difficult” year for Sri Lanka, even though he remains positive about the country’s overall economic growth this year and the year next.


Standard Chartered’s global research team expects the island nation’s economy to grow 4.2 percent this year and 4.5 percent next year, slightly higher than the forecasts of the IMF and World Bank. But they pointed out that Sri Lanka would always have to be on guard about its debt sustainability. 


Sri Lanka is struggling to repay its foreign loans with a record US $ 5.9 billion due this year, including US $ 2.6 billion in the first quarter.


Sri Lanka on average has to settle US $ 4 billion every year for the next four years and further significant debt repayments are scheduled to occur between 2024 and 2027.


Anand acknowledged the Central Bank’s prudent measures to raise funds swiftly before the election cycle begins. 


The Central Bank has announced plans to raise up to US $ 5 billion within the first three to four months of the year, which includes sovereign bonds to the tune of US $ 2 billion. 


“Debt repayment is coinciding with the political cycle. Sri Lanka is facing a good amount of elections in the next 12 to 15 months. It is important to raise a decent amount of dollars in the first half before those cycles start, so you create a buffer before the next round of raising begins,” he said. 


“We expect the IMF talks to end positively and the programme to get extended. The focus should be now on stability rather than growth,” he added. 


Meanwhile, Standard Chartered ASEAN and South Asia FX Research Head Divya Devesh said Sri Lanka’s rupee would fare well this year compared to 2018, given the benign external environment.


“After a very difficult 2018, this year will be more favourable to the local currency,” he said.


Devesh said a number of factors, including declining oil prices, lower broad US dollar, given the slowdown in the US economy, ending of the Fed’s hiking cycle and relaxing of the global equity situation should be positive for the Sri Lankan rupee.  “The domestic picture is going to be mixed,” he said, referring to Sri Lanka’s twin deficit and high foreign debt repayments.


“We’re going to see more range-bound dollar-rupee trading environment in 2019 unlike in 2018 where there was one-way rupee depreciation,” he said.

 

 

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