Feb 25, Colombo: Sri Lanka, by a substantial amount exceeded the overall deficit target of 7 percent of GDP required to receive the third tranche of the US$ 2.6 billion stand-by agreement and disbursing the installment would be delayed until after the general elections, an International Monetary Fund (IMF) official said today.
An International Monetary Fund team led by Dr. Brian Aitken was in Sri Lanka from February 16 - 25 to conduct the second review of the Stand-By Arrangement, approved on July 24, 2009.
The team met with officials from the Central Bank, the Ministry of Finance and Planning, and other government ministries and departments, the Presidential Tax Commission, and representatives of the private sector and civil society.
Issuing a statement at the end of the review mission the IMF official said the "ceiling on domestic budget borrowing—consistent with the government's overall deficit target of 7 percent of GDP—was exceeded by a substantial amount."
The higher deficit mainly reflects faster-than-expected infrastructure project implementation, higher interest payments, and sluggish fourth-quarter revenue growth, the official said.
"We are currently assessing the implications of this outturn for bringing the underlying budget deficit to a sustainable level," Dr. Aitken said.
The IMF official said they continue to assess the Sri Lanka Central Bank's monetary policy stance as appropriate while the economic growth remaining below its potential and lending is slowly picking up.
"The Central Bank has acted appropriately through its monetary operations by not allowing higher budget spending to be financed through the creation of additional liquidity," the IMF official said.
The IMF expects the inflation to remain low and the recent upward trend in inflation due to increases in food and other international commodity prices to peak in the mid year and to reverse in the latter half of the year.
"This phenomenon is not unique to Sri Lanka and is currently taking place in many other counties as well. Overall, we expect average inflation for the year as a whole to stabilize in the high single digits." He said.
"Overall economic conditions are improving as expected, and the economy is poised for a recovery this year. External balances are strong, remittance inflows continue at a high rate, tourism prospects are rapidly improving, and gross reserves remain at comfortable levels," the review has concluded.
The IMF team will be visiting Colombo after the new government is formed following the parliamentary elections in April to to discuss plans for a full-year 2010 budget, including tax reform measures.
"We remain engaged in a constructive dialogue with the government, with the aim of agreeing on policies to support staff’s recommendation to IMF Management and the IMF’s Executive Board for the completion of the current review of the Stand-By Arrangement," the IMF official said.
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