Sunday Observer Online


Sunday, 10 May 2015





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Macroeconomic performance:

Risks on the rise

Recent macroeconomic performance has generally been strong but risks appear to be on the rise while real GDP growth registered 7.4 percent in 2014.

Growth was broadbased, with the exception of agriculture which suffered from drought early in the year and heavy rains and floods in the fourth quarter. Price pressures have been contained, with headline and core inflation declining to 2.1 and 1.2 percent, by the end of the year, said the IMF Executive Board at the conclusion of the third Post Program Monitoring Discussion with Sri Lankan officials last week.

Reductions in administered prices for fuel facilitated the record low levels of inflation. Preliminary data indicate the 2014 fiscal deficit exceeded the budget target by about one percent of GDP, as spending cuts were unable to compensate for a further decline in the tax revenue-to-GDP ratio.

This is the first year since 2009 that the deficit was not reduced as a share of GDP, the Board said.

Monetary policy has been accommodative, with private sector credit showing signs of recovery late in the year. The external current account was broadly stable in 2014, with stronger tourism and remittances partially offsetting a wider trade deficit as goods import recovered in the second half of the year.

The Central Bank has accumulated foreign exchange reserves of $721 million for the year. The outlook is broadly stable but set against heightened downside risks. Real GDP growth is projected at 6.5 percent in 2015 and beyond — in line with IMF staff’s estimate of potential output.

While there is considerable growth momentum, downward pressure may emerge from such factors as lower public and private investment due to budget cuts and an uncertain policy environment, a crowding out of private sector credit, and the potential for negative spillovers from slower economic recovery in Europe — one of Sri Lanka’s two most important export markets, the Board said.

The fiscal deficit is a key concern for 2015 and the medium-term.

This year’s deficit target will be difficult to reach even with relatively optimistic assumptions regarding revenue gains. In the absence of new measures to create a more durable increase in tax collection, revenue in 2016 will drop as the one-off measures expire, while the permanent increase of recurrent spending from the revised 2015 budget will likely push the deficit higher — raising the level of risk to debt sustainability.


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