Sri Lanka seeks to lower IMF fiscal targets after political crisis

• To renegotiate with IMF on fiscal targets
• Budget deficit to be near 5% this year
• Presidential poll to be held this year, parliament polls 2020
• Populist policy measures on the cards ahead of polls

(Colombo) REUTERS: Sri Lanka will ask the IMF to ease its 2019 budget deficit target of 3.9 percent under a US$1.5 billion loan programme, to give the economy more time to recover from a political crisis, a senior Finance Ministry official said on Thursday.

Investor confidence took a hit when President Maithripala Sirisena abruptly sacked Prime Minister Ranil Wickremesinghe in October and replaced him with pro-China strongman Mahinda Rajapaksa.

The country’s top court ruled the ouster was illegal and Wickremesinghe was restored to power in December - but the seven-week-long crisis hurt the rupee and drove sovereign bonds yields higher, straining government finances.

Finance Minister Mangala Samaraweera and Central Bank Governor Indrajit Coomaraswamy will push the IMF during meetings in Washington next week to continue the loan disbursal programme under a revised deficit target, officials said.

“They will renegotiate and ask to revise the targets from the IMF to continue the programme,” the senior Finance Ministry official told Reuters, asking not to be named.
The official did not comment on the new target they wanted - but the government’s own forecast is for a budget deficit of 4.8 percent of GDP in 2019, significantly bigger than the 3.9 percent originally agreed with the IMF.

There was no immediate comment from the IMF.

On Tuesday, State Finance Minister Eran Wickremeratne did not comment on the specifics of the upcoming meetings with the IMF but acknowledged to Reuters that the deficit targets needed to be reexamined “as we need to be realistic”.

Wickremeratne said the budget deficit for 2018 would be around 5 percent of GDP, higher than the target of 4.8 percent.

He added that Sri Lanka would have to pay an additional US$ 125 million due to a rise of nearly 2 percent in the yields of international sovereign bonds during the two months after Wickremesinghe’s removal.

Elections for a new president this year and for parliament in 2020 will also make it difficult for the country to carry out tight fiscal and monetary policies as opposition leader Rajapaksa steps up campaigning, experts said.

“Given the populist pressure from Rajapaksa and looming parliamentary and presidential elections, the government will find it difficult to increase revenue and control spending,” said Sasha Riser-Kositsky, Eurasia Group’s analyst.

The island nation has to repay a record US$ 5.9 billion foreign debt this year. Foreign outflows from government securities crossed US$ 1 billion last year and the rupee fell 19 percent.

“We do think that overall the budget targets are overly ambitious,” said Christina Iacovides, Assistant Economist at Capital Economics.

“We also doubt that the targets for government revenue and expenditure will be met. Overall, we think the economy will struggle for momentum, especially as fiscal tightening is expected to drag on.”