Business Times

Govt. needs to cut deficit amidst rising inflation

The government needs to make every effort to control the budget deficit during the second half of 2010 if it were serious about achieving the budget deficit target of 7% of GDP as outlined in the terms for the US$2.6 billion standby arrangement with the International Monetary Fund (IMF), a senior economist said.
Economist Sirimal Abeyratne, who is also a senior lecturer at the Economics Department at the University of Colombo, told the Business Times this week that with the 2009 budget deficit coming in at 9.7% of GDP, even the IMF should have earlier proposed ways on keeping the figure in control. “We haven’t seen anything like that at the implementation level.”

Dr. Abeyratne pointed out that the President’s election manifesto outlined further increases in government expenditure but with the economic recovery in 2010, government revenue should increase as well. “Along with this, there should be some reforms in public sector expenses to contain the budget deficit even at a 7% to 8% level,” he said.

IMF Resident Representative Koshy Mathai said that according to a report from the Treasury released this week, the budget deficit was 9.7% of GDP for 2009. The report also mentions a budget deficit of 7.5% of GDP projected for 2010. “However, we want to wait and discuss the government’s full year budget in which will be presented their comprehensive fiscal plans for this year and beyond before coming to an assessment of whether their intentions remain in line with the objective they laid out in the programme with us,” Dr. Mathai said. He added that the original target for this year was 6% plus some provision for reconstruction-related spending.

Dr. Abeyratne said the government’s considerable expenditure commitments for 2010 will most likely drive inflation levels up in the months to come. He said the future inflation rate will respond to two factors, the first being the increase in world prices due to the anticipated economic recovery and the second being domestic policy, particularly in relation to government spending. If there is a serious attempt at the policy level to limit government spending as expected by the IMF, Dr. Abeyratne said the impact of domestic factors on inflation can be lowered.

The Department of Census and Statistics announced last week that annual average inflation as measured by the Colombo Consumers’ Price Index (CCPI) stabilized at 3.1% in February 2010 but that point to point inflation increased to 6.9%. Point to point inflation in January 2010 was recorded at 6.5%. Dr. Abeyratne explained that the difference between the annual average and point to point rates is a technical matter.

“As we know, world prices fell sharply during 2009,” he said. “This had a significant impact on domestic price level. As the inflation rate was over 22% in 2008, the 2009 increase was marginal as reflected by the average annual rate. Point-to-point rate is calculated on monthly basis so that the monthly inflation has increased by 6.9% compared to the price level 12 months ago.”

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