Economy: Nosediving or sailing towards safer waters? 

By Dr. Janaka Ratnasiri-April 24, 2016, 9:19 pm

Two news items on the economy of the country which appeared in The Island recently prompted me to write this. One was a press release issued by the leader of an IMF team, Todd Schneider, who visited Colombo during March 31- April 11 to hold discussions with the government on its request for a loan. The other was a news item on a statement made by the Governor of the Central Bank at a press briefing.

IMF Mission recommendations

The IMF team has observed: "Macroeconomic performance in 2015 reflected a mix of positive underlying growth momentum, the impact of domestic policies, and an increasingly difficult external environment. The fiscal deficit expanded, public debt increased, and the balance of payments position deteriorated despite an improvement in the terms of trade".

The team has made several recommendations, among which was "other near-term steps include a clear strategy to define and address outstanding obligations of state enterprises, start broadening the tax base by reducing tax exemptions, and introduction of a new Inland Revenue Act." The key recommendation is the reduction of tax exemptions.

Central Bank and bonds

The Central Bank Governor’s view on the economy has been that "government finances are out of sync. There is a chronic tax-shortfall and as a consequence of the vast wage increase given to public servants, our recurrent expenditure has ballooned. Thus, the need for borrowing has increased. On top of that, the external environment is less benign for emerging markets. These factors have combined to create a volatile situation. Our borrowing rates are quite high."

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