Sri Lanka to continue with fiscal consolidation despite slower growth

COLOMBO (Reuters) - Sri Lanka will stay on a path of fiscal consolidation embarked on three years ago, despite slowing economic growth, the island nation’s junior finance minister said yesterday.

Since 2015, the US$87 billion economy has introduced tax reforms, tight monetary policy, financial discipline in government institutions and reforms of loss-making State-owned enterprises, and adopted a fuel price formula that is adjusted monthly.

While tight monetary policies have helped to bring down the budget deficit to 5.2 percent of the Gross Domestic Product (GDP) last year from 7.5 percent when the reforms began in 2015, economic growth has slumped to a 16-year low of 3.3 percent last year, from 5 percent in 2015.“If you look at some of the measures we have taken since 2015 in terms of reforms, one of the casualties has been the growth rate because of the other physical disciplines that have been put in place,” Junior Finance Minister Eran Wickremeratne told an economic forum in Colombo.

“We would not divert from that path of fiscal consolidation because we think that we need to look at the vulnerabilities and take much more long-term perspectives.”
Sri Lanka has targeted a budget deficit of 4.8 percent of the GDP this year, in line with the International Monetary Fund’s conditions for a US$1.5 billion loan.

Despite a presidential election looming next year, the unity government is left with limited options other than to persevere with the reforms.

Wickremeratne said the difficult measures taken by a coalition government made up of the country’s two main parties have helped to curb the budget deficit, reduce inflation, while boosting exports and the country’s foreign exchange reserves.

Growth suffered last year from a combination of tight economic policies and the farm sector suffering a double whammy of drought and floods.

The International Monetary Fund (IMF) has forecast economic growth to rebound to 4 percent this year, while analysts say it could reach 4.5 percent growth.