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
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
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
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.