Budget gets IMF support

• But insists fiscal discipline and reforms essential to keep market confidence 

• Says 3.5% Budget deficit possible by 2020

• Wants Statements of Corporate Intent for more SOEs, transparent energy pricing

• Backs prompt release of audited financial statements for SOEs, KPIs 

• Keen to see SriLankan Airlines put on better financial footing
  
   

By Uditha Jayasinghe 

Budget 2019 has drawn support from the International Monetary Fund (IMF), but it comes coupled with a call for a prudent policy mix with continued fiscal discipline and reforms, especially stronger performance monitoring of State-owned enterprises (SOE) to strengthen the economy. 

International Monetary Fund (IMF) Mission Chief for Sri Lanka Manuela Goretti told Daily FT that an extension of the $1.5 billion Extended Fund Facility (EFF) is likely to go before the IMF Executive Board in May. Nonetheless she insisted it was imperative for the Government to continue fiscal consolidation and reforms to put the economy on a sustainable path.  

“With public debt at over 90% of GDP, large refinancing needs, and low reserve buffers, a prudent policy mix is necessary. Sustaining the fiscal consolidation effort and reform momentum is key to maintaining market confidence. The 2019 Budget recently announced by the Sri Lankan authorities strikes an adequate balance by advancing fiscal consolidation while also accommodating critical public spending and growth-friendly tax measures to mitigate the impact of the adjustment on the most vulnerable and support investment and growth,” she said.

Budget 2019 has set an ambitious deficit target of 3.5% but has drawn criticism from the Opposition for increasing expenditure to provide a Rs. 2,500 salary increase to the public sector and a slew of other benefits, including increased pensions and tax cuts. Many experts have pointed out that revenue targets are too ambitious and unlikely to meet the levels expected by the Government even though the Inland Revenue Act will complete a full year in 2019.

However, Goretti said the Government’s fiscal consolidation targets are equally spread over 2019 and 2020, which put it in line to achieve the target of 3.5% Budget deficit next year. The IMF also cautioned against fiscal slippage which is described as “critical” to meet an estimated $5.9 billion in debt repayment for 2019. 

“Continued fiscal discipline in 2019 is critical to safeguard fiscal sustainability and meet Sri Lanka’s large refinancing needs. The implementation of the Inland Revenue Act and other tax reforms will increase tax collections, while providing generous investment incentives for businesses. This will help reduce the fiscal deficit and place the debt to GDP ratio on a downward path, while preserving space for well-targeted social spending and critical public investment projects.” 

Putting the IMF program back on track after it was suspended during the 52-day Constitutional Crisis would require the Government returning to basics, Goretti added. 

“There are three key elements to put the program back on track: implementing revenue-based fiscal consolidation and SOE reforms to put public debt on downward path; resuming efforts to rebuild foreign exchange buffers; and accelerating structural reforms. These elements are essential to address macroeconomic imbalances, strengthen the resilience of the economy to shocks, and lay the foundations for strong, sustainable and inclusive growth.” 

Even though 2019 is an election year, Goretti encouraged the Government to follow through with transparent energy pricing, which was initially scheduled for 2017 but has been postponed multiple times. She also said the Government should expand the use of Statements of Corporate Intent (SCI) to more SOEs and push for audited financial statements to be published regularly. The need for the latter has also been highlighted by the Government’s own Committee on Public Enterprises (COPE) and the Committee on Public Finance (COPF). 

“More SOEs should have SCIs and their performance should be monitored regularly against KPIs. Audited financial statements should also be published more promptly. The implementation of the monthly fuel pricing formula was an important step towards achieving cost recovery levels and mitigating fiscal risks from CPC. Further efforts are needed to complete energy reforms. The authorities’ plans to bring SriLankan Airlines back onto a sound financial footing are also welcome,” she added. 

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Reforms essential for sustainable growth