IMF raises concern over Sri Lanka's fiscal deficit

Wed May 6, 2015

(Reuters) - The International Monetary Fund raised concern on Wednesday over Sri Lanka's fiscal deficit in 2015 and the medium term after the new government increased wages and spending.

The Fund said the 2015 deficit target of 4.4 percent of gross domestic production (GDP) "will likely be very difficult to reach even with relatively optimistic assumptions regarding revenue gains".

The new government of President Maithripala Sirisena, who unseated former leader Mahinda Rajapaksa in a Jan. 8 election, has changed several fiscal policies including reducing import taxes on some commodities and fuel prices.

The government introduced some revenue measures in a revised 2015 budget soon after the election, including a one-off super gain tax to raise revenue by 80.3 billion rupees while increasing recurrent spending by nearly 6 percent or an extra 87 billion rupees ($652.66 million).

"In the absence of new measures to create a more durable increase in tax collection, revenues in 2016 will drop as the one-off measures expire, while the permanent increase to recurrent spending from the revised 2015 budget will likely push the deficit higher," the IMF said in a statement.

A higher deficit would raise some concerns about the government's ability to service its debt, the IMF said.

The statement followed the global lender's third review of economic conditions in Sri Lanka following the completion in 2012 of a $2.6 billion emergency loan to the country.

The fiscal deficit reversed a falling trend last year for the first time since 2009 and hit 6 percent, rising from 5.9 percent in 2013 and well above the government's 5.2 percent target.