The International Monetary Fund (IMF) has expressed concern about Sri Lanka's high budget deficit which reached 9.8% of GDP in 2009 although the organization says prospects for the economy are tremendously strong as long as the policy environment is correct.
Speaking at the American Chamber of Commerce (AMCHAM) in Colombo this week, IMF representative to Sri Lanka Koshy Mathai said the fiscal situation is a medium term problem.
He said the government is planning to present a budget with lower deficit targets and implement measures to simplify the tax system and improve investment climate.
Dr. Mathai said the outline of the budget includes substantial reductions in government spending. The government should grow GDP and reduce deficits that are run every year and try to balance the debt portfolio. He added that the government is also keen to rebuild the infrastructure all over the country. Sri Lanka has a high debt to GDP ratio of 86% and a deficit of almost 10% of GDP which is above average for emerging market. Dr. Mathai said countries that have low public sector debt have high private sector credit although the situation is reversed in Sri Lanka and even in India.
The first half of 2008 during the onset of the global financial crisis caused huge problems for Sri Lanka on the external front, Dr. Mathai explained.
The import bill rose due to high oil prices and there was a sharp but temporary decline in remittances.
This was coupled with the decline of investor interest in government bonds which placed a lot of pressure on the rupee.
A year later in 2009 with the end of the war, Dr. Mathai said investor appetite for bonds began to increase while oil prices declined. Imports slowed down as the economy also slowed but reserves were built up as remittances improved. He said there is still scope for increasing reserves in the country.
Dr. Mathai described monetary policy as good. Credit growth to the private sector which is still negative year on year has been increasing modestly month on month. GDP growth is also picking up with the IMF forecasting 6.5% growth for 2010.
The situation in the North is improving with banks opening new branches although there is more to be done in terms of infrastructure development and the continuation of the demining process.
Dr. Mathai added that on the global front, advanced economies are expected to grow at 2% this year while developing economies are expected to grow at 6% with China and India forecasted to record growth figures of 10% and 8% respectively. He said unemployment rates have been high in advanced economies and the housing crisis which led to the global financial crisis has led to a dramatic decline in householder wealth in these economies.