Sri Lanka economy facing inflationary, revenue risks

COLOMBO: The International International Monetary Fund said Sri Lanka’s economic growth is slowing more than the government expects, and faces additional risks from high inflation, lower tax revenue and slow structural reforms.
The comments came a day after Sri Lanka said it would not pursue a new loan from the IMF after the global lender had indicated the government had made considerable progress in stabilizing its finances.
The central bank has estimated the economy will grow 7.5 percent in 2013, accelerating from last year’s estimated 6.5 percent.
However, the IMF said it expected the island-nation’s economy to expand 6.25 percent this year, and estimated last year’s growth slowed to 6 percent. The economy grew by a record 8.3 percent in 2011.
“The recovery will likely be constrained by the need to continue fiscal consolidation, high inflation, which limits the room for near-term monetary easing, and a continued slow recovery in Sri Lanka’s main trading partners, particularly the US and EU,” John Nelms, the head of IMF staff mission told reporters after concluding two weeks of consultations with Colombo authorities.
Nelms also projected the annual inflation rate would remain elevated at around 8 percent by end of this year, from the current near-high 9.8 percent hit in January.
The government needed to take measures to broaden and strengthen its tax revenue base to support further fiscal consolidation, he added.
“Tax revenues have now fallen below 11.5 percent of GDP, among the lowest in the region, reflecting slowing activity, falling imports, exemptions, and issues with tax administration,” Nelms said.
The IMF said achieving the 2013 budget deficit target of 5.8 percent of GDP would be challenging amid weaker tax administration.
It also said the government needs to put loss-making, state-run Ceylon Electricity Board and Ceylon Petroleum Corporation on a more sustainable footing.
Global credit rating agencies have often said Sri Lanka’s credit rating is constrained by high external debt and fundamental fiscal weaknesses, but it has been able to issue a handful of sovereign bonds in recent years which were oversubscribed by investors betting on a boom after the end of the country’s 25-year civil war.
A $2.6 billion IMF loan program agreed in 2009 has helped Colombo keep its inflation rate in the single digits, boosted its badly-depleted reserves to a record high and reduced the fiscal deficit and debt-to-GDP ratio to manageable levels. The final tranche of that loan was disbursed last summer.
Under the plan, Sri Lanka took a series of steps, including allowing a flexible exchange rate and raising interest rates.