More than two years ago (in February 2007), the IMF closed its office in Colombo with Luis Valdivieso, the Fund's senior resident representative for Sri Lanka, then saying the closure was due to budget cuts and also because there were no lending programme with Sri Lanka.
This week, Koshy Mathai, an Indian-American economist and the new IMF representative in Colombo, assumed responsibilities at his office in the Central Bank building and, it would appear, immediately walked into a mine-field.
Last week, the IMF, in response to an email query over a vote-on-account (mini budget) being presented instead of the national budget for 2010, said: “We are in the process of discussing the implications of the vote-on-account budget with the government and what it might mean in the context of the programme."
The second tranche of the IMF facility is due any moment now, following the visit of a fund mission to Sri Lanka last month, but could get delayed due to the fresh issues the fund is confronted with vis-à-vis the temporary budget issue.
The government has announced a mini budget to cover spending between January-April 2010 and said a proper budget would follow after a new parliament is elected and with that a new administration. Parliamentary polls are due before April 2010 with a presidential election also expected before April.
Government ministers have said the change of plans to a vote-on-account is a non-political move and a standard procedure before an election, as it enables the new government to present its own budget and development plans. However the opposition United National Party claims the move to postpone the budget is because an election-year budget with huge election-spending (and handouts) would jeopardise the IMF’s $2.6 billion standby facility which has specific targets on budget deficits and balance of payments.
Under these targets, Sri Lanka’s budget deficit must be restricted to 7 % of GDP this year and roll down to 5% of GDP in 2011 when the 2-year loan facility ends, a tall order this year, according to economists.
Dr Sirimal Abeyratne, a senior economist from the University of Colombo, says that the government is unlikely to maintain this year’s budget deficit targets, adding that already in the first six months of 2009 the deficit is at 11.5 % of GDP.
According to figures given by him, the total budget deficit for 2008 was Rs 307 billion and in the first, six months of that year the deficit was Rs 153 billion easily enabling the target to be maintained. However this year the budget deficit in the first six months alone has reached a phenomenal Rs 256 billion from a total, annual targeted deficit of Rs 337 billion.
“If a budget was presented, the government would be in a difficult position to maintain these targets as a budget would definitely have had election spending and it would have gone way above deficit targets,” he said.
While government spending hasn’t reduced – with military spending also expanding over new recruitment -, state revenue is also below target, an issue Dr Abeyratne reckons is because of a slowdown in general business activity.
Rehabilitation of the north and the east is also a huge cost to the government.
This week the cabinet approved the vote-on-account of Rs 362.5 billion while a supplementary estimate for defence is also due to be presented in parliament next week.
Dr Abeyratne says the government is faced with a interlocking situation with the budget deficit targets and, has two possible options: After parliamentary elections (assuming it won), introduce drastic measures to cut spending and restore the budget targets, or consider pulling out of the IMF programme – as some sections in the government feel – as the foreign reserves position has improved with more inflows from loans, remittances and the stockmarket, and also bond issues. On Friday, the Central Bank said there was tremendous response to the government’s sovereign bond of $500 million which has been oversubscribed by 13 times.
Elections and overruns in the budget deficit targets have put the government on the back-foot and in a tricky position vis-à-vis disbursement of the second instalment of the IMF loan. But with the clever Dr P.B. Jayasundera returning to his familiar ground as Treasury Secretary, this hurdle would, most likely be overcome.