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IMF delay would not impact in the short term
But long term fiscal issues need to be addressed

A senior IMF official says a delay in the third tranche under the standby facility would not have an adverse affect on Sri Lanka’s economy but stressed it was important to continue to in the programme as it seeks to address underlying fiscal issues — creating sustainable budgets and private sector growth.

Last Friday, an IMF mission reviewing Sri Lanka’s December quarter performance for the US$ 326 million third tranche of the US$ 2.6 billion standby facility said its disbursement would be deferred until the new cabinet prepares the budget for 2010.

This is because the fiscal deficit target for 2009 (7 percent of GDP) is overshot by about 1 to 1.75 percent of GDP, according to rough estimates of the IMF mission.

The mission does not have all the figures nor the final budget numbers for 2009 and since the deficit appears to be significantly off-target the IMF mission prefers to come back after elections when the new budget is ready so as to gauge the government’s policy direction.

This means the third tranche would be delayed by more than a month, at the least.

"The delay of the tranche would not have a direct affect on Sri Lanka’s economy. Reserves are US$ 5 billion plus and is in a strong position. The tranche is only US$ 326 million," Dr. Brian Aitken, Chief of the IMF mission to Sri Lanka told journalists last Friday.

He said the purpose of the IMF standby facility was to avert a balance of payments problem, a short term issue, which has since subsided after the war ended.

But the programme is not only designed to address short term imbalances (the balance of payments and reserves) but would overtime address Sri Lanka’s persistent fiscal imbalances.

Dr Aitken said the continuance of the programme, was crucial as it would give a signal to investors that the country was working towards achieving sustainable budget deficits and creating an environment for private sector growth.

He said it would also give potential long-term foreign investors confidence that the government was addressing issues regarding the country’s macro economy.

"The government has expressed its willingness to continue with the programme," Dr Aitken said.

According to the IMF, the substantial increase in the budget deficit is the result of faster-than-expected infrastructure project implementation (for the most part), higher interest payments on borrowings and sluggish fourth quarter revenue growth with some of the taxes not coming in as expected, such as import duties on motor vehicles.

Sri Lanka has always struggled with runaway budget deficits that exceed budgeted levels a fiscal responsibility act was introduced a few years ago in a bid to curtail fiscal expansion but with little success.

The Central Bank and other analysts have time and time again warned the government that it needs to reign in wasteful expenditure, put an end to reckless, profligate spending and minimise accessing domestic sources to finance deficits, at rates lower than market rates, if economic activity is to be stimulated.

Why we need the IMF...

"Things have improved tremendously since we first thought about the IMF sometime late 2008 or early 2009. One might argue that we no longer need the IMF. It may even be the case. But there is a big reason why the programme should continue," a senior economist told the Island Financial Review.

"Our budget deficits have always been a problem. It made fighting the war extra difficult, and it made facing the global financial crisis more difficult than it should have been. The private sector has to compete for financial resources and often the government gets these funds at mush lower rates.

"It is true the government was making every effort to curtail the deficit but it has failed to do so. There are underlying structural problems that need to be addressed. The president has indicated that the government, the old and the new that is to be elected shortly, is committed to addressing these issues.

"But there is little room for people to keep tabs. With the IMF programme, there are quarterly reviews and this would help the people, and also the government, stay focused," he said.

Another economist, also not wanting to be named, said the IMF is not expected to police the government on fiscal issues. It cannot use the disbursements of the US$ 2.6 billion loan to entice or force the government to be fiscally disciplined.

"This is what the people should be doing. And if the government fails to live up to the programme it only means the government cannot keep its own word, as laid out in the Mahinda Chintana and the Fiscal Responsibility Act.

"Of course, we should be proud to tell the IMF we do not need them any more, and I think we are half way there.

"But our fiscal position is, and has always been, in such a mess. I say this because for whatever good reason the government overshot expenditure targets, like fighting the war, taking care of IDPs and development activities there have also been waste, corruption and sheer recklessness.

"Genuine reforms would take time, but the leaders of this country owe it to everyone of us, not only to begin those changes but be seen doing them. A good place to start would be to enforce the rule of law," he told the Island Financial Review.

"However, on the positive side the economy is expected to grow, the tax commission is working on a paper to reform the tax administration and investors are bullish on Sri Lanka. This should help reign in budget deficits, but that does not mean the government should do nothing about its fiscal indiscipline," he said.

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