By Shihar Aneez –
The News International – Sri Lanka will face a challenge in meeting this year’s budget deficit target as the recent monetary and fiscal tightening measures may hurt revenue growth, the island nation’s central bank chief told Reuters on Monday.
The $59 billion economy has agreed with the International Monetary Fund (IMF) to target a budget deficit of 6.2 percent of the gross domestic product, the lowest since 1992 and down from last year’s 6.9 percent, to continue a $2.6 billion loan.
“The challenge now is to ensure that the fiscal deficit of the government is in line with what was budgeted for and that the government’s borrowings were budgeted for,” Central Bank Governor Ajith Nivard Cabraal said in an interview.
“The government needs to work out carefully as to what internal adjustment they carry out whether some expenditure is reduced or revenue is increased or the both.”
Sri Lanka has taken some drastic policy decisions to avert a balance-of-payment crisis after the IMF withheld disbursement of a loan following the monetary authority’s failure to heed its repeated request for a flexible exchange rate.
On the monetary front, the central bank stopped intervening in the currency market, raised policy rates to two-year highs and limited commercial banks’ credit to 18 percent from last year’s 34 percent.
The government, on its part, also has raised fuel, electricity, and transport prices and taxes on vehicle imports aimed at reducing the trade deficit to $9.1 billion this year.
Following these moves, the IMF approved the disbursement of $426.8 million from the total $2.6 billion loan on April 3 with waivers.
The island nation’s balance-of-payments swung into a deficit of $1 billion in 2011 as trade deficit for the year ballooned to a record $9.7 billion and the central bank spent more than $2.6 billion to stave off depreciation in the second half of 2011.
The recent measures are expected to cool the economic growth, which the central bank has already revised down to 7.2 percent from its original estimation of 8 percent and they are also expected to hit government revenue, making it harder for the government to meet the 6.2 percent fiscal deficit target.
“Certainly, delivering that number in today’s context is not an easy one and we would like see them (government) taking necessary actions that is on line.”
The central bank raised key policy rates on April 5 for the second time since February to curb credit growth, which it said was expanding at an “undesired pace”, which would in turn control the trade deficit by reducing imports.
The island nation’s monetary authority raised the repurchase rate by 25 basis points to 7.75 percent and the repurchase rate by a much higher 75 basis points to 9.75 per cent. Economists had expected only a 25 basis point increase in the both rates.
“We increased the rates because we were not satisfied with the initial imports data we were receiving,” Cabraal said.
However, the bank deliberately raised reverse repurchase rate more than expected, he added.