Sri Lanka Plans to Cut Deficit by Half as Economic Expansion after War Boosts Revenue

07th April 2010, www.bloomberg.com, By Anusha Ondaatjie

Sri Lanka plans to nearly halve its fiscal deficit in three years as the end of the island’s 26-year civil war spurs economic growth and boosts revenue, Treasury Secretary P.B. Jayasundera said.

The budget shortfall is targeted to narrow to 5 percent of gross domestic product by 2012, from 9.7 percent last year and 7.5 percent in 2010, Jayasundera said in an interview at his Colombo office yesterday.

“We will not compromise on public investment but revenue will be raised,” he said. “As the deficit falls, borrowing from banking sources will disappear.”

The International Monetary Fund said Feb. 25 it may consider changing a $2.6 billion loan package to Sri Lanka after government spending to rebuild areas destroyed when ethnic Tamil rebels were routed last year caused the deficit to exceed the lender’s target. The Central Bank of Sri Lanka has forecast economic growth of 6.5 percent this year, 7.5 percent in 2011 and 8 percent in 2012.

President Mahinda Rajapaksa, whose government faces parliamentary elections tomorrow, has pledged to spend $1 billion a year to build new roads, ports and power plants.

Under the IMF loan approved in July, Sri Lanka is expected to cut its deficit to 6 percent of GDP in 2010, from 7 percent last year, and to reduce it to 5 percent by 2011. Fitch Ratings said last month that Sri Lanka’s credit rating may be lowered if the island nation fails to narrow its budget deficit.

2010 Budget

The IMF has said it will decide whether to grant Sri Lanka a third loan tranche of about $330 million after completing a review of the $42 billion economy once the government presents its 2010 budget.

Sri Lanka’s foreign-exchange reserves are at a record $6 billion, after dipping to $1.27 billion before the IMF bailout package.

“The IMF targets will have to be revised,” Jayasundera said. “Now that stabilization is over, the program needs to be more of a buffer to help create growth in the medium-term.”

The government’s delayed 2010 budget is likely to be presented in June, following consultations with the newly elected government, Jayasundera said.

“It will be a policy budget, with a new tax regime and growth momentum for the private sector while rationalizing public spending,” he said. “Defense and interest expenditure has stabilized.”

Central bank Governor Nivard Cabraal left interest rates unchanged in March for a fourth straight month, holding the reverse repurchase rate at 9.75 percent, its lowest level since November 2004.

Sri Lanka, which usually presents its budget for the calendar year the preceding November, tabled spending estimates for the first four months of 2010 due to the elections.

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