Sri Lanka cannot grow with short-term fiscal and monetary push: central bank

ECONOMYNEXT – Sri Lanka cannot grow with short term fiscal and monetary push, the country’s central bank said, after nearly a year such both policies drove the country into the arms of the International Monetary Fund.

The budget deficit grew to 7.4 percent of gross domestic product in 2015, up from 5.7 percent in 2014, with the bulk of it financed domestically.

About 80 billion rupees was printed at the year end according to central bank data, in the 12-months to October 2015 it was around 191 billion rupees. Of that about 65 billion rupees (500 million dollars) was in respect of a forex reserve appropriation to repay a sovereign bond which has no effect on the exchange rate or domestic demand.

The year-end data shows lower central bank financing of the budget deficit as monetized debt was repaid with proceeds of a sovereign bond issue which reduced the total central bank credit to the government to only 80.2 billion rupees.

However the damage was done. The printed money spilled over to the balance of payments and the rupee collapsed from 131 to 145 to the US dollar and the country recorded a balance of payments deficit of 1.489 billion US dollars.

"Short term fiscal and monetary stimuli are inadequate to support economic growth continuously, and tightening policy spaces and resource constraints point to the fact that such short term stimuli are no longer affordable," the central bank said.

"Therefore, it is necessary for the country to adopt a proper blend of structural reforms, including fiscal reforms on revenue and expenditure fronts as well as with regard to SOEs (state-owned enterprises), ensure policy consistency and improve the ease of doing business in order to attract non debt creating capital flows.

"These reforms must aim at harnessing and synergising the country’s strengths, including its human capital, with greater participation of the private sector."

The central bank said the economy is expected to grow by 5.8 percent in 2016, and 6.3 percent in 2017 up from 4.8 percent in 2015.

Sri Lanka is now negotiating a reform based Extended Fund Facility. The government has to raise more taxes from the people.