While commending for robust growth, low inflation and narrowing of the current account deficit, the International Monetary Fund (IMF) yesterday cautioned Sri Lanka on its fiscal and external fronts.
“Recent macroeconomic performance has generally been strong but risks appear to be on the rise,” the IMF Executive Board, concluding its third post-programme monitoring discussion with Sri Lanka, said in a statement.
“The outlook is broadly stable but set against heightened downside risks,” it added.
Sri Lanka missed its budget deficit target for the first time in the post-conflict period, as the country reported a fiscal deficit of 6 percent of gross domestic product (GDP) for the year 2014, amid revenue collection shortfalls and higher expenditure.
The government aimed to reduce the deficit to 5.2 percent of GDP in 2014 from 5.9 percent of GDP in the previous year.
“The fiscal deficit is a key concern for 2015 and the medium term. The 2015 deficit target will likely be very difficult to reach even with relatively optimistic assumptions regarding revenue gains.
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,” the IMF noted.
According to the multilateral lender, the external sector outlook for 2015 appears favourable but there are several risks.
The IMF estimates US $ 2 billion windfall for Sri Lanka’s import bill in 2015, due to sharp drop in oil prices.
“Assuming goods exports remain in the current range, the improvement in the trade balance should provide a cushion to the overall balance of payments and allow for further accumulation of the Central Bank foreign exchange reserves.
With capital flows at comparatively normal levels, net inflows should be sufficient to keep Central Bank foreign exchange reserves in the range of around four months of imports.”
Given the risks associated with the high public debt, the IMF urged Sri Lanka to adopt more ambitious measures to contain the current expenditure while protecting priority social and high value-added infrastructure spending.
The IMF also advised close monitoring of credit and inflation developments, given the potential turn in the credit cycle and long lags in monetary transmission.
They stressed that it is important to be prepared to act if signs of overheating emerge.
Meanwhile, the IMF Directors agreed to extend post-programme monitoring in light of risks and the desirability of maintaining a close policy discussion between the authorities and the Fund.
“Directors looked forward to the new government’s comprehensive economic policy agenda.”