IMF projects higher deficit for Sri Lanka
21 September 2015 04:11 am
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By Chandeepa Wettasinghe
The International Monetary Fund (IMF) recently said Sri Lanka’s budget deficit would be worse than projected by the government this year, and passed on recommendations for the 2016 national budget.
“The mission projects a fiscal deficit in the range of 5.5 to 6 percent of GDP in 2015—higher than budgeted and financed mainly by domestic borrowing,” IMF Mission Head Todd Schneider said. The 2015 National Budget of former President and Finance Minister Mahinda Rajapaksa which was passed in last November had projected a 4.6 percent deficit, and Finance Minister Ravi Karunanayake’s interim budget in January after the change of regime had estimated a deficit of 4.4 percent.
The IMF’s worsened projection is possibly due to the interim revenue measures not being passed as legislation, which Karunanayake said would be done this week.
However, the funds allocated for subsidies, public spending etc. in the interim budget were expanded during the course of the year as well.
“Looking ahead, the 2016 budget is an opportunity to shift decisively back to a durable medium-term path of fiscal consolidation and to set macroeconomic priorities for 2016 and beyond,” Schneider said.
He advised that the deficit must be kept at 5.5 percent of GDP in 2016 through reforms aimed at restraining expenditure and creating durable revenue streams.
“The mission emphasized the need to eliminate tax expenditures—exemptions, tax holidays and reduced rates—as the most important component in a strategy to make the tax system simple, fair, and efficient,” Schneider said. He noted that putting state-owned enterprises in a commercial footing and subjecting them to market forces would also help reduce risks to the budget.
Schneider also said that subsidies given in the budget would help economic growth.
However, local economists have said that subsidies—formerly funded through foreign aid and debt—are not the way, as subsidies are currently given to dying out traditional industries over potentially competitive sectors to protect vote bases, which would ultimately cost the voter in reduced standards of living.
Treasury Secretary Dr. R. H. S. Samaratunga recently said that all subsidies given in the 2015 National Budget and interim budget will be continued in 2016. If revenue is not restructured next year, further borrowings will have to be undertaken to foot the bill.
Schneider said that the public debt must be reduced. Sri Lanka’s debt to GDP ratio is 76.6 percent, and 49 percent of it is foreign borrowings due to the lack of substantial domestic savings.
Hails rupee floating
The IMF welcomed the Central Bank’s (CBSL) decision to stop defending the rupee, which would help exports. “The mission welcomes the CBSL’s recent decision to cease setting daily spot prices for the rupee and let market forces play a greater role in determining the exchange rate,” Schneider said.
He said that the exchange rate regime should depend on export competitiveness and maintaining foreign reserves.
Until the elections, Karunanayake had pressed on the belief that foreign reserves are healthy and that the rupee will be defended.
This was done in order to maintain the consumption drive spurred through subsidies in the interim budget.
After freeing the exchange rates, prices of essential goods—most of which are imported—have significantly increased.