The International Monetary Fund (IMF) this week said it was happy with two components of Sri Lanka’s economy – foreign reserves and monetary policy – but noted that the major challenge was fiscal policy and it was awaiting the December figures to check whether targets were met.
IMF Representative in Sri Lanka Dr Koshy Mathai said the government kept to the fiscal targets set for the quarter to July and the quarter to September. “However we have to see the December target which is the one (that has to be) consistent with the fiscal deficit target of 7% of GDP (Gross Domestic Product) for 2009,” he told the Business Times in an interview on Thursday.
He said while the authorities have been disciplined on the expenditure side (so far) the last few months data (September to December) needs to be checked on both revenue and expenditure as to whether they are under control or not.
The newspaper posed questions on when the third tranche is due, targets set in the fund’s Standby Arrangement (SBA) with Sri Lanka in which two tranches have been disbursed and the current account surplus that Sri Lanka was having for the first time in 32 years (since 1977).
He praised the Central Bank for its policies vis-à-vis the IMF programme and expressed ‘great’ satisfaction with the reserves position. “In fact in most countries we have to urge the Central Banks to tighten their (monetary) policy whereas in Sri Lanka the reverse is happening where the policies are good and meant to bring down inflation,” he said.
On monetary policy, Dr Mathai said, “while earlier we thought there was scope to loosen (the policy), now with the latest rate cuts by the Central Bank, we believe monetary policy is in the right place. We need to wait for a few months before deciding if it needs to be changed (either tightened or loosened).”
Expressing a note of caution, Dr Mathai, who arrived two months ago as the fund’s first Sri Lanka representative reopening an office that was closed in January 2007, said the government has set ambitious fiscal deficit targets of 6% in 2010 and 5 % in 2011 and noted that waiting for the economy to recover and boost revenues naturally is not likely to be enough to meet the ambitious 2010 and 2011 targets.
“There would have to be serious changes in the budget, ways of enhancing revenue, ways of cutting expenditure - maybe in politically difficult ways - but some substantial changes would have to be done if the government wants to reduce the deficit,” he noted.
Asked about the third tranche in the $2.6 billion loan, Dr Mathai said the IMF, after the November visit of a mission team, will continue to monitor the situation, including performance against the end-December targets, before deciding on how to proceed.“We are waiting to check the December (quarterly) targets,” he said adding that after that a recommendation would be made to the IMF Executive board. “We are not in any delay mode at the moment.”
Asked to respond to the Central Bank announcement of Sri Lanka ending 2009 with the first current account surplus since 1977, Dr Mathai said the surplus is in line with the trend in many countries where imports have shrunk and consumer demand substantially falling. However he noted that imports are expected to pick up and a similar surplus is unlikely in 2010. He said increased remittances could also trigger increased spending by those who receive these remittances (families of migrant workers).