The International Monetary Fund (IMF) has warned Sri Lanka that it is exceeding budget targets and urged tough measures to cut subsidies, especially on fuel, in order to salvage the economy.
Sri Lanka also badly needs to restructure public enterprises like the loss-making Ceylon Electricity Board and the Ceylon Petroleum Corporation, and revive a faltering peace process with the Liberation Tigers to lure investment, the lender added.
In a detailed report on the state of the island’s economy, the IMF said the government has overspent on subsidies while failing to collect expected tax revenues so far this year.
“Collections in several areas have fallen short of expectations, including excise tax and import duties,” it said in a 73-page report released last Thursday.
“On the expenditure side, subsidies for fuel have been considerably higher than budget provisions and 20 bln rupees (200m USD) has already been spent on tsunami relief.”
“The fiscal deficit exceeded budget targets, and with a significant amount of government financing provided by the central bank (outside the budget), the growth in monetary aggregates increased, contributing to higher inflation,” it added.
The IMF also said Sri Lanka’s central bank’s decision to hike interest rates by a quarter percentage point on Tuesday in a bid to slow galloping inflation was insufficient.
“In view of the prevailing high inflation, and continued high growth in monetary and credit aggregates, monetary policy should be tightened further,” the international lender warned.
It forecast inflation at 14 pct this year, up from 7.9 pct last year and 2.6 pct in 2003.
However, the IMF noted that the December 26 tsunami which killed over 31,000 people and left a million homeless had brought a respite to the economy by way of increased foreign aid and a freeze on some of its foreign debt.
Monitoring aid flows and ensuring accountability in their use will be a key priority in mobilising external financing for tsunami reconstruction, the IMF said.
“At the same time, fiscal policy will have to be implemented carefully to reduce demand pressures by taking steps to enhance revenue, reduce subsidies and cut back on development spending in lower priority areas,” the IMF said.
The country’s economic growth was projected at 5.3 pct, down from 5.4 pct in 2004 and 6.0 pct in 2003.
“There are several downside risks,” the IMF said. “The authorities will need to be prepared to take additional measures to meet fiscal objectives, including further adjustments in domestic fuel prices, which may prove politically difficult.”
But, with presidential elections pending the future of Sri Lanka’s economic policy is uncertain.
Ruling party candidate - and current Prime Minister - Mahinda Rajapakse has signed a pre-election deal with a powerful Marxist-cum-Sinhalese nationalist party, the JVP, in which he has pledged to halt privatisation if elected.
The IMF said that managing the economy in the near-term will be a challenge and warned that the policy slippage experienced in 2004 must be avoided.
The medium-term outlook hinges on the ability to move toward consolidation, reviving peace efforts and raising investment to levels comparable to its East Asian peers.
Diplomatic efforts to get the Colombo government and the Tamil Tigers back to the negotiating table remain deadlocked since April 2003.
“The medium-term outlook depends on Sri Lanka’s ability to move toward fiscal consolidation, implement structural reforms and revive the peace process,” the IMF said.
Sri Lanka also badly needs to restructure public enterprises like the loss-making Ceylon Electricity Board and the Ceylon Petroleum Corporation, and revive a faltering peace process with the Liberation Tigers to lure investment, the lender added.
In a detailed report on the state of the island’s economy, the IMF said the government has overspent on subsidies while failing to collect expected tax revenues so far this year.
“Collections in several areas have fallen short of expectations, including excise tax and import duties,” it said in a 73-page report released last Thursday.
“On the expenditure side, subsidies for fuel have been considerably higher than budget provisions and 20 bln rupees (200m USD) has already been spent on tsunami relief.”
“The fiscal deficit exceeded budget targets, and with a significant amount of government financing provided by the central bank (outside the budget), the growth in monetary aggregates increased, contributing to higher inflation,” it added.
The IMF also said Sri Lanka’s central bank’s decision to hike interest rates by a quarter percentage point on Tuesday in a bid to slow galloping inflation was insufficient.
“In view of the prevailing high inflation, and continued high growth in monetary and credit aggregates, monetary policy should be tightened further,” the international lender warned.
It forecast inflation at 14 pct this year, up from 7.9 pct last year and 2.6 pct in 2003.
However, the IMF noted that the December 26 tsunami which killed over 31,000 people and left a million homeless had brought a respite to the economy by way of increased foreign aid and a freeze on some of its foreign debt.
Monitoring aid flows and ensuring accountability in their use will be a key priority in mobilising external financing for tsunami reconstruction, the IMF said.
“At the same time, fiscal policy will have to be implemented carefully to reduce demand pressures by taking steps to enhance revenue, reduce subsidies and cut back on development spending in lower priority areas,” the IMF said.
The country’s economic growth was projected at 5.3 pct, down from 5.4 pct in 2004 and 6.0 pct in 2003.
“There are several downside risks,” the IMF said. “The authorities will need to be prepared to take additional measures to meet fiscal objectives, including further adjustments in domestic fuel prices, which may prove politically difficult.”
But, with presidential elections pending the future of Sri Lanka’s economic policy is uncertain.
Ruling party candidate - and current Prime Minister - Mahinda Rajapakse has signed a pre-election deal with a powerful Marxist-cum-Sinhalese nationalist party, the JVP, in which he has pledged to halt privatisation if elected.
The IMF said that managing the economy in the near-term will be a challenge and warned that the policy slippage experienced in 2004 must be avoided.
The medium-term outlook hinges on the ability to move toward consolidation, reviving peace efforts and raising investment to levels comparable to its East Asian peers.
Diplomatic efforts to get the Colombo government and the Tamil Tigers back to the negotiating table remain deadlocked since April 2003.
“The medium-term outlook depends on Sri Lanka’s ability to move toward fiscal consolidation, implement structural reforms and revive the peace process,” the IMF said.
