To boost ailing economy:

Govt needs to ‘recalibrate’ 2016 Budget - CB Governor

by Chandani Jayatilleke

The Government needs to ‘recalibrate’ its 2016 Budget and present the final version to the International Monetary Fund (IMF), seeking financial support to give a boost to the ailing economy.

Central Bank Governor Arjuna Mahendran said he was confident of economic recovery. “Once we are ready with the final version of the budget, the IMF will come back to review it and do the final touches to the budget and the IMF lending program.

“We are expecting the whole process to be completed by the end of the month, provided that the IMF agrees to our proposals,” he told the Sunday Observer.

Sri Lanka has asked for IMF support after running into balance of payments problems, with the rupee depreciating sharply and foreign investors withdrawing funds from the capital markets.

Mahendran said the IMF thoroughly analysed the economy with Sri Lankan economists and made some initial observations in recent talks.

“The key one is that they want the government to (in the light of adverse international developments and other external issues such as falling oil prices and investment funds of Middle Eastern countries selling our shares and bonds) adjust the budget proposals and come out with a final version. This is now being done”

The Cabinet was due to discuss the matter on Friday.

The Central Bank Governor acknowledged that the budget deficit is the ‘biggest problem.’ “We have borrowed a lot over the past 10 years with 94% of revenue collection going to pay debts, leaving very little room to borrow afresh.”

Sri Lanka’s tax-to-GDP ratio is about 10%, one of the lowest in the world, with peer countries are raising around 25% of the GDP from taxes, he said. Mahendran acknowledged that the recent Fitch rating downgrade would affect investor sentiment but noted: “Our problem is known to everybody now.”

Meanwhile, economic analysts say that government’s budget will need to strike a balance between addressing short-term needs and looking at the medium term and structural policies.

Anushka Wijesinha, senior economist at the Ceylon Chamber of Commerce, said comments by ratings agencies from the latter part of last year had given hints that they were looking at a ratings revision.

“So in some ways, this wasn’t a huge surprise. But of course it will, along with global market conditions and rising rates, affect Sri Lanka’s borrowing costs abroad.”

Wijesinha said ratings agencies cite Sri Lanka’s fiscal position as a key reason for their outlook.

“This continues to be a concern for us too. The precarious tax revenue collection, the absence of overall tax reforms, the inability to pass key items of the Budget 2016 yet - all these are worrying from a policy certainty point of view. So, tackling the fiscal side - both revenue and expenditure - must be part of the government effort, to signal ratings agencies to make a positive revision,” he said. Still, some long-term investors remain attracted by the island’s economic potential, despite the rating downgrade.

Takanori Shimizu, a senior analyst/advisor at Bansei Securities Company, a 105-year firm that is one of the oldest licensed brokers in Japan, said despite the Fitch downgrade his company will advise Japanese individual investors to continue to invest in Sri Lanka. “We are still recommending Sri Lanka, although the rating is not very attractive.

But we ask them to look at Sri Lanka as a destination for long-term investments. We will do that for the next 10 years,” he said through email correspondence.

However, he said the government needs to work hard and show its commitment to improve economic conditions to attract more foreign direct investments.