IMF’s obsession on primary deficit target puts SL further in debt bind: Analyst

The obsession on an arbitrarily set primary balance target in the budget by the International Monetary Fund (IMF) is driving Sri Lanka into a debt bind, perhaps much worse than what it is in right now, an analyst cautioned.

IMF Staff Mission Chief Peter Breuer in his parting remarks last week concluding a review reiterated the need for Sri Lanka to hit their whimsical primary balance target of 2.3 percent of Gross Domestic Product (GDP).

For this to happen, Sri Lanka must raise revenue for which it needs to tax people more and cut spending, which means selling State assets, less subsidies and welfare for the needy and small businesses who are in an endless struggle to be competitive in the global markets, an economic analyst said.

Breuer said in his statement last Friday that he wants to see these measures in the upcoming budget this year, providing a sense of how much of a say the IMF has over the internal affairs in governance.  

This is all while Sri Lanka already is outperforming its revenue targets and the economy is recovering with the first quarter growth accelerating to 5.3 percent. “What holds back Sri Lanka’s growth and perhaps will push the country deeper into debt is the egregiously higher taxes which prevents the economy from its full potential,” the analyst said requesting anonymity.

“What further aggravates the problem is to over emphasise on a primary balance which will cut back State spending. By which the IMF insidiously keeps from talking about the higher debt service payments, particularly of the foreign commercial debt taken from 2015 through 2019 which came to a head in 2022,” the analyst added.

Any new debt to bridge the budget deficit is going to have to come from the commercial sources themselves as the IMF became successful in getting the constitutional framework in place during their two years in the country.

The New Central Bank Act prevented the Central Bank from helping the government with their funding needs unless it is going to be an emergency, the arbiter of which is ironically not the Sri Lankan parliament. 

It was further reinforced by the more recent piece of legislation, the Public Finance Management Act which only doubles down on the primary balance and the primary expenditure and keeps mum on the debt service payments, the analyst said.