Sri Lanka Brief
FeaturesConsolidating fiscal deficits crucial for Sri Lanka, says IMF;SL now need is life support, claims Harsha

Consolidating fiscal deficits crucial for Sri Lanka, says IMF;SL now need is life support, claims Harsha


 * Public debt and inflation high, tax revenue and exports on the decline
* Capital expenditure cut to contain budget deficit in 2012
 * Cost recovery  pricing for energy on government agenda

The International Monetary Fund (IMF) said that Sri Lanka would have to stick to budget deficit targets in order to bring down high levels of public debt, contain high inflation and put the economy on a much more sustainable growth trajectory and attract foreign direct investments to boost the balance of payments.

Exports, which have been declining as a percentage of GDP and world trade ‘over a long term trend’, need to be redirected to Asia, the multilateral lender said.

IMF Mission Chief Dr. John Nelmes speaking to journalists in Colombo yesterday (13) said the budget deficit target of 6.2 percent of GDP for 2012 may have been overshot slightly and that the debt-to-GDP ratio was very high and needed to be contained.

He said the government had cut capital expenditure and deferred cash payments in order to come close to the 6.2 percent of GDP budget deficit target last year, and achieving the 5.8 percent of GDP target this year would be challenging. “But the government is committed to achieving this target which is commendable,” Dr. Nelmes said.

Sticking to this target would help the economy reduce its already high debt-to-GDP ratio, which was 81 percent as at end 2012, and help the Central Bank conduct its monetary policy which would keep inflation contained.

Expanding the tax base, reforming revenue administration and introducing an automatic price adjustment formula for energy would be crucial if the government was serious about continuing with the infrastructure development programme without accumulating too much debt.

Cuts to capital expenditure, such as in 2012, would inhibit competitiveness, productivity foreign direct investment flows and debt sustainability, Dr. Nelmes warned.

“Sri Lanka has gained macroeconomic stability, but there is room for improvement. By consolidating the fiscal balance, the government could increase domestic savings. This would ease pressures on the current account deficit and lead to a situation where the balance of payments is built up from non-debt inflows,” Dr. Nelmes said.

Tax revenue for 2012 amounted to around 11 percent of GDP and was on the decline over a long term trend, and concerted effort was necessary to reverse the trend, Dr. Nelmes said. Revenue collection in Sri Lanka was one of the lowest in the region and was no where near what was required for a country that wanted high growth.

Dr. Nelmes said countries that sustained high growth had better tax revenue levels at the upper teens, such as 18 percent of GDP.

He said measures were needed to broaden the tax base, limit exemptions and reform administration.

The IMF was in favour of an automatic price adjustment mechanism, or cost recovery pricing, for energy. This would help contain the build up of debt to sustain the Ceylon Petroleum Corporation (CPC) and Ceylon Electricity Board (CEB) and end the habit of introducing disruptive price increases from time to time which was difficult on both a social and political point of view, Dr. Nelmes said.

They was very much on the government’s agenda, Dr. Nelmes said.

“There is a dialog internally within the government that such an automatic price adjustment mechanism would be necessary and we believe this is a step in the right direction. It is better to have a stable policy than have stable (controlled) prices. However, we believe the government should target the vulnerable for cash transfers rather than provide outright subsidies to the entire economy and there are examples of successful programmes in other parts of the world,” he said.
pic-  IMF Mission Chief Dr. John Nelmes (right) with IMF Resident Rep. Dr. Koshy Mathai


Forget budget support; what SL now need is life support, claims Harsha
UNP MP Dr. Harsha de Silva yesterday claimed that what Sri Lanka now needs was neither budget support nor balance of payments support, but “life support”.
 In a statement, the main Opposition party’s chief spokesman on the economy said the economic lifeblood of the people of Sri Lanka was being sucked dry the political crooks – be it by handing out frontloaded and unviable projects to the Chinese at horrendously unfavourable terms or by using the money of the millions of employees to manipulate the Colombo Stock Exchange to benefit the mafia.
“Like we have said in the past, it is now becoming clear the regime is only interested in the 0.1 per cent of the people at the expense of the rest. While the clique drives in under-invoiced Rolls Royce Ghosts that are paid for by the man on the street, he is taxed on even the packet of instant noodles he buys for his children to stay alive,” opined UNP MP.
 Following is the rest of Dr. de Silva’s statement:
 The President, in his capacity of Minister of Finance, announced with the presentation of the 2013 Budget that there would be no foreign commercial borrowing to bridge the deficit this year. This is because the Government has borrowed so much under commercial terms that repayments are beginning to bite. Therefore it was expected that the Government would seek the assistance of development partners for budgetary support at concessional terms and also shift the focus to domestic borrowing.
 However, when Dr. P.B. Jayasundera announced recently that the Government was seeking budgetary support from the IMF, we pointed out this was highly unlikely, as the IMF does not have such programs for Middle Income countries like Sri Lanka, as far as we are aware. We argued that the Government could have perhaps negotiated an Extended Fund Facility (EFF) given to countries facing serious medium-term balance of payment problems due to structural weaknesses as in the case of Sri Lanka. But such negotiations we noted would have certainly included reforms that cannot be postponed and very well understood by the learned Secretary. In times like this, it is in the interest of everyone to accept reality and deal with it instead of attempting to pretend that we are doing so well that we are not only the ‘Wonder of Asia’ but also the latest Breakout Nation!
 In this background we have today been informed by the Governor of the Central Bank that the negotiations with are IMF are over as we do not require any more balance of payments support; neither in the form of a EFF nor in the form of a Stand-By Arrangement like the one we used to bail ourselves out last time. This, he had said, is because the Central Bank has more than sufficient foreign exchange reserves.
 This is almost a tragicomedy! The right hand does not seem to know, or care, what the left hand is doing. One the one hand, the Treasury is looking for budgetary support and on the other, the Central Bank is refusing balance of payments support.
 Perhaps the Governor wanted to pull the plug from the conditional ‘Nirvana’ the Secretary was hoping to attain while starting on the reforms the learned economist knows is essential. That is if the IMF gave the Treasury the US$ 1 billion up front to be spent even with limited conditions, then that would have meant a huge relief for the Treasury and it would have been possible to undertake the reforms even on a staggered basis.
 But now that option is not available. With the World Bank confined to a project to spruce up Colombo and the ADB continuing with its limited infrastructure financing and no other donor in sight, it seems inevitable that the Government has no choice but to go back to high cost and almost choking commercial borrowing and Chinese loans, however, with extremely lucrative commissions for the arrangers; all of which will have to paid by the 99 per cent of the hard working people of this country.
 With a few more years of such sucking out of the economic lifeblood of the people, the current need for life support will no longer be there. The manipulating clique will live in the lap of luxury skiing in the Alps, while the rest of the people will be long gone.

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