EconomyNext – The International Monetary Fund (IMF) has advised Sri Lanka to have contingency measures to keep the government budget deficit under control should ambitious new revenue proposals fail.
A visiting IMF mission said in a statement that in its assessment achieving a deficit of 4.4 percent of Gross Domestic Product, as planned by government, "will be challenging."
"(The) authorities should consider contingency measures should revenues fail to materialize as projected," it said.
This was one of the concerns with the new government’s recent interim budget the visiting IMF mission highlighted.
The IMF mission said real GDP growth is estimated at 7.4 percent for 2014 and is likely to continue in the relatively robust range of 6-7 percent in 2015.
Inflation is expected to remain in the "low single-digits, although some upward pressure" may emerge as higher wages and salaries given in the government’s latest budget translate into increased demand.
The external current account improved in 2014 and will likely strengthen further in 2015 given lower oil prices and further growth in exports, services trade and inward remittances, the IMF said.
The mission agreed with the authorities that prospects remain favourable and that sustaining growth through the medium term will require continued commitment to policies in support of macro-economic stability, structural reforms to enhance productivity and competitiveness.
"We welcome the government’s commitment to good governance, increased transparency and fiscal discipline," the IMF said.
"The mission and authorities agreed that medium term fiscal consolidation should remain a lynchpin in macro-economic policy, ensuring a gradual reduction in Sri Lanka’s public debt."
The IMF team also said one-off tax measures introduced to finance the budget "do not in the mission’s view constitute a step towards a more effective tax system."
The mission and the authorities agreed on the need for more comprehensive reforms to streamline the tax system and to reduce or eliminate exemptions to put revenues on a steady upward path.
Forthcoming technical assistance from the IMF will focus on these areas, it said.
The IMF also said a succession of steps to ease monetary policy over 2013-14 helped facilitate a recovery of private credit in late 2014 and early 2015.
It said the current stance of monetary policy appears "appropriate" but urged the central bank to closely monitor credit, inflation and liquidity developments.
The IMF mission said it "noted" the reduction in central bank foreign reserves over the last six months and emphasised the need for exchange rate flexibility.
"Intervention should be limited to dealing with excessive short term volatility," the IMF said.
"The exchange rate does not appear to be out of line with fundamentals, particularly given the improvement in the balance of payments."