Sri Lanka - overall conditions improving:

IMF predicts strong economic growth

by Gamini Warushamana

The International Monetary Fund (IMF) said the overall economic conditions of Sri Lanka are improving as expected and the economy is likely to show strong growth this year. There is no uncertainty as the conflict and elections are over. Therefore, the economic growth will be strong this year, Head of the IMF Mission, Brian Aitken told the media last week following meetings with Government officials.

The Mission did not confirm the release of the next tranche of the stand-by agreement facility. However, Aitken said that it is likely to release the next tranche, over US$ 300 million, in four to six weeks if its Management and Board are satisfied with the country’s budget deficit for 2010.

External balances are strong, remittance inflows continue at a high rate, tourism prospects continue to improve rapidly and gross reserves remain at comfortable levels. We continue to assess the Central Bank’s monitory stance as appropriate, with bank lending only slowly beginning to rebound and economic growth still below potential. We see little sign of emerging demand-driven inflationary pressures and average inflation for the year as a whole is expected to remain in single digits”, he said.

The main concern of the IMF was fiscal consolidation. The third tranche of the US$ 2.6 billion IMF stand-by agreement facility approved in July last year, was suspended due to the results being behind schedule. The budget deficit last year was 9.75 per cent of GDP against the program target of seven per cent.

Aitken said project disbursements that are faster than expected, higher interest payments, weak revenue and post conflict rehabilitation and humanitarian expenditure are the main factors for the higher budget deficit.

Referring to the discussions held with the Government, the IMF Mission said the Government has laid out a set of policies intended to correct the slippages and move towards sustainable deficit reduction while securing spending for protecting the most vulnerable in society.

Budget 2010 will be presented to Parliament in June with substantial deficit reductions for the year as a whole, driven primarily through savings in recurrent expenditure.

The Government is planning comprehensive tax reforms based on the recommendation of the Presidential Tax Commission.

Referring to revenue expansion measures, Aitken said that broadening the tax base and simplifying the tax system are the main concerns. The tax concessions for the BOI investments will be revised, considering the stable and secure environment in the country.

Macro-economic stability is the basis for private sector expansion and reducing the budget deficit is essential to prevent macro-economic instability.

Foreign investors look for a stable and predictable environment and tax holidays are a minor factor in attracting foreign investments.

“I think foreign investors are prepared to pay reasonable taxes. The Government’s view is that it is not necessary to give large tax breaks as stability and security have improved”, he said.