IMF - Sri Lanka Economy Strong, Expects Fiscal Commitment to Meet Its 2009 Budget Deficit Target

09th November 2009, www.bloomberg.com, By Anusha Ondaatjie

The International Monetary Fund said the release of a second payment in its $2.6 billion loan to Sri Lanka indicates a strong performance and fiscal commitment from the South Asian island economy.

The Washington-based lender expects the government to meet its 2009 budget deficit target of 7 percent of gross domestic product, Koshy Mathai, the IMF’s resident representative for Sri Lanka, said in a conference call today.

“We expect revenue to pick up and the deficit target to be reached,” Mathai said. “Sri Lanka’s reserve position has swelled to an extremely comfortable level.”

The IMF’s executive board on Nov. 6 agreed to disburse $329.4 million to Sri Lanka after a review of its policies implemented under the 20-month loan agreement approved in July. The Central Bank of Sri Lanka said Nov. 7 its foreign exchange reserves will surpass an unprecedented $5 billion with the IMF funds and grow further amid increased investor confidence.

Sri Lanka should boost reserves further through increased exports and remittances, Mathai said. The central bank’s policy of adding to reserves by accumulating foreign flows and preventing a sharp appreciation of the currency “has been a sensible policy,” he said.

The government’s sale of dollar bonds in overseas markets has also helped make borrowing costs cheaper and diversified the island’s fund raising options, Mathai said.

Growth Forecast

The government last month sold $500 million of five-year bonds in its first international offering in two years to raise funds for reconstruction after the end the island’s 26-year civil war in May.

Sri Lanka’s $41 billion economy may grow as much as 6 percent next year after expanding about 3.5 percent in 2009, Central Bank Governor Nivard Cabraal said Oct. 6. The IMF raised Sri Lanka’s 2009 growth forecast on Sept. 22 to 3.5 percent from a July estimate of 3 percent.

Cabraal has driven down interest rates to a three-year low, taking advantage of easing inflation to spur spending and make up for slowing exports.

“Recent economic developments have been stronger than expected and the near-term outlook has improved,” Takatoshi Kato, IMF’s deputy managing director and acting chairman, said in an e-mailed statement Nov. 6.

“While the fund-supported program had helped Sri Lanka avoid a balance of payments crisis, fundamental vulnerabilities remain to be addressed,” Kato said.

Budget Deficit

Sri Lanka agreed to reduce its budget deficit to 5 percent of gross domestic product by 2011, from 7 percent this year, as a condition for the IMF aid package.

The government in an Oct. 30 supplement to the so-called Letter of Intent signed in July said it was on track to meet the 2009 deficit target while expecting a faster accumulation of reserves by the end of this year and the first quarter of 2010.

Still, the government said there could be delays in fiscal reforms, including broadening the tax base, as the administration on Nov. 3 presented spending estimates for the first four months of 2010 in lieu of a full budget, ahead of elections expected to be held before April.

“Nevertheless, we remain committed to achieving our original target of reducing the underlying budget deficit - excluding reconstruction spending - to 6 percent of GDP in 2010,” the government said.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net