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The IMF has waived the target on domestic borrowings of the Sri Lankan government in its first review which resulted in the approval of the second disbursement under the US$ 2.6 billion standby facility, as authorities could not submit sufficient data.
IMF Resident Representative for Sri Lanka, Dr. Koshy Mathai in a teleconference with journalists last week said the other kind of waiver allowed by the Executive Board of the IMF was called a waiver of applicability.
"It means that all the data necessary to assess the target were not available to us," Dr. Mathai said.
However, Dr. Mathai said the waiver was granted because the IMF was confident the government was within the programme target.
"On the basis of what data was available to us we do believe (the government) is likely to meet the target, but we cannot confirm it because all the data are not available. Therefore, we have to request a formal instrument of a waiver of applicability, but it does not mean that the target was missed," Dr. Mathai said.
The fiscal deficit expanded by 30 percent during the first nine months of this year. The overall budget deficit for the first nine months of 2009 reached Rs. 322.6 billion or 6.5 percent of GDP increasing 30 percent compared to a deficit of Rs. 246.9 billion for the corresponding period of 2008 which was 5.6 percent of GDP, a Central Bank report shows.
The Central Bank says revenue collection for the year would be below the estimated target in the 2009 budget.
"According to revised estimates prepared by the Ministry of Finance and Planning in July 2009, the total government revenue for 2009 would be Rs. 727 billion (14.8 percent of GDP), reflecting a shortfall of about Rs. 127.3 billion compared to the original target of Rs. 855 billion," the Central Bank said.
However, government revenue increased 12 percent year-on-year during the first nine months of 2009 to Rs. 522 billion due to increases in income tax revenue and non-tax revenue.
Recurrent expenditure is expected to decline against the budgeted target but the Central Bank warns it could raise over and above estimates as a result of high interest payments.
Total expenditure and net lending increased 19 percent to Rs. 844.7 billion for the first nine months of 2009. Recurrent expenditure for the first nine months of this year amounted to Rs. 661.5 billion, a 26.2 percent increase from Rs. 524.1 billion for the corresponding period last year.
"This increase was mainly due to the increases in interest payments (an increase of 63 percent to Rs. 253 billion from the corresponding period of 2008), salaries and wages (20 percent increase to Rs. 204 billion) and pension payments (17 percent to Rs. 62.6 billion).
"High interest rates that prevailed in the domestic market and the significant amount of domestic borrowings during the latter part of 2008 and the first quarter of 2009 where the main reasons for the significant increase in interest payments," the Central Bank said.
"According to revised estimates, total expenditure and net lending in 2009 is likely to decrease by about Rs. 117.6 billion to Rs. 1.07 trillion compared to Rs. 1.19 trillion expected in the original budget," the Central Bank said.
"However, recent developments indicate that recurrent expenditure would increase over and above the revised estimates mainly due to the high domestic interest payments," the Central Bank said.
Capital expenditure declined marginally by 2.7 percent to Rs. 183.2 billion from Rs. 188.3 billion for the corresponding period of 2008.
"Capital expenditure would be below the targeted level given the difficulties in maintaining domestically funded capital expenditure and mainly due to the lower than expected performance in government revenue," the Central Bank said, pointing to the continuance in the trend of sacrificing capital expenditure—long term public investments—over recurrent expenditure.
Dr. Mathai said the IMF was confident the government would achieve the deficit target of 7 percent of GDP by the year end and 6 percent in 2010. The Central Bank said this would happen.
"In order to meet this target, required policy measures need to be introduced to enhance revenue, rationalisation of recurrent expenditure and improvements in government debt management," the Central Bank said in its report ‘Recent Economic Developments: Highlights of 2009 and Prospects for 2010 issued earlier this month.
"Nevertheless, public investments (capital expenditure which declined 2.7 percent during the first nine months of the year) would be maintained, thereby complementing and promoting private investment as well as enabling the required development of conflict affected areas," it said.
Government think-tank, the Institute of Policy Studies (IPS) said Sri Lanka’s fiscal developments so far this year has been poor and could weaken further despite optimistic budget deficit targets.
"Sri Lanka needs to maintain fiscal flexibility in order to respond effectively to the needs of the once war-torn regions of the North and East," the IPS said in its flagship publication ‘Sri Lanka: State of the Economy 2009’ released last month.
The IPS said fiscal developments for the first four months of the year had been unfavourable with data suggesting that Sri Lanka’s fiscal situation is set to weaken considerably, contrary to the optimistic fiscal deficit target of 6.5 percent of GDP announced in November 2008 in the government’s budgetary estimates for 2009.
"Indeed, the revised fiscal target of 7 percent of GDP announced following the Letter of Intent with the IMF also looks to be similarly optimistic," it said.
The IPS said the government should cut down on profligate expenditure.
"The immediate response calls for rationalisation of expenditures—cutting back on profligate expenditure—so that priority areas are not duly affected," the IPS report said.
