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‘Is Sri Lanka’s Fiscal House in Order?’ – IMF mission chief

Proposals put forward in Sri Lanka’s budget “raise questions” said the International Monetary Fund's mission chief for Sri Lanka, in an op-ed published this week.

Todd Schneider outlined concerns in both Sri Lanka’s revenue and spending targets, saying “the direction of policies and the lack of a medium-term context”.

Stating Sri Lanka’s targeted rise in public revenue “seems ambitious—perhaps overly ambitious”, Mr Schneider said “apart from being an unprecedented increase, the main underlying measures—for the most part—are likely to work toward lowering revenues”.
Sri Lanka’s proposed spending raises “the concern is whether the overall targets can indeed be met”, he said. 

Noting that “spending for other goods and services almost doubles, and the reason for this has yet to be clarified,” Mr Schneider added “the risk is that capital spending could be slashed in the event of revenues falling short—which has been the case for the past several years”. “This underscores the need for realistic revenue estimates which would then provide greater certainty to the path of critical expenditures.”

“Even assuming the budget is executed as planned, there is still the question of how to finance a deficit close to 6 percent of GDP,” he added. Latest figures from the Central Bank noted that Sri Lanka’s trade deficit grew on a cumulative basis, increasing by 3.8 % to US$ 6.145 billion.

“The budget envisions a second year of heavy reliance on domestic debt—covering about three-quarters of the total deficit, with the remainder financed by issuance of new external debt,” he continued. “Here again, the numbers should raise questions.”

“A large portion of new domestic financing is assumed to come from Sri Lanka’s nonbank financial sector, while bank financing (which rose precipitously in 2015) is projected to fall. It is not clear whether the nonbank sector has the liquidity to cover this financing gap.”

“The fundamental solution to this problem involves restructuring the tax framework and tax administration to make the system simple, fair, and efficient,” concluded the IMF mission chief.

“The proposed budget falls far short of steps needed to move the Sri Lankan tax system in this direction. Without such commitments, medium-term prospects may suffer from the same weaknesses seen in the past—continued deficits, tight limits on needed investment in infrastructure and human capital, and a persistent overhang of public debt that undermine Sri Lanka’s ability to cope with shocks.”

Read his full op-ed here.