Consolidating fiscal deficits crucial for Sri Lanka, says IMF
* Public debt and inflation high, tax revenue and exports on the decline
* Capital expenditure cut to contain budget deficit in 2012
* Cost recovery pricing for energy on government agenda
February 13, 2013, 8:25 pm 
The International Monetary Fund (IMF) said that Sri Lanka would have to stick to budget deficit targets in order to bring down high levels of public debt, contain high inflation and put the economy on a much more sustainable growth trajectory and attract foreign direct investments to boost the balance of payments.
Exports, which have been declining as a percentage of GDP and world trade ‘over a long term trend’, need to be redirected to Asia, the multilateral lender said.
IMF Mission Chief Dr. John Nelmes speaking to journalists in Colombo yesterday (13) said the budget deficit target of 6.2 percent of GDP for 2012 may have been overshot slightly and that the debt-to-GDP ratio was very high and needed to be contained.
He said the government had cut capital expenditure and deferred cash payments in order to come close to the 6.2 percent of GDP budget deficit target last year, and achieving the 5.8 percent of GDP target this year would be challenging. "But the government is committed to achieving this target which is commendable," Dr. Nelmes said.
Sticking to this target would help the economy reduce its already high debt-to-GDP ratio, which was 81 percent as at end 2012, and help the Central Bank conduct its monetary policy which would keep inflation contained.
Expanding the tax base, reforming revenue administration and introducing an automatic price adjustment formula for energy would be crucial if the government was serious about continuing with the infrastructure development programme without accumulating too much debt.
Cuts to capital expenditure, such as in 2012, would inhibit competitiveness, productivity foreign direct investment flows and debt sustainability, Dr. Nelmes warned.
"Sri Lanka has gained macroeconomic stability, but there is room for improvement. By consolidating the fiscal balance, the government could increase domestic savings. This would ease pressures on the current account deficit and lead to a situation where the balance of payments is built up from non-debt inflows," Dr. Nelmes said.
Tax revenue for 2012 amounted to around 11 percent of GDP and was on the decline over a long term trend, and concerted effort was necessary to reverse the trend, Dr. Nelmes said. Revenue collection in Sri Lanka was one of the lowest in the region and was no where near what was required for a country that wanted high growth.
Dr. Nelmes said countries that sustained high growth had better tax revenue levels at the upper teens, such as 18 percent of GDP.
He said measures were needed to broaden the tax base, limit exemptions and reform administration.
The IMF was in favour of an automatic price adjustment mechanism, or cost recovery pricing, for energy. This would help contain the build up of debt to sustain the Ceylon Petroleum Corporation (CPC) and Ceylon Electricity Board (CEB) and end the habit of introducing disruptive price increases from time to time which was difficult on both a social and political point of view, Dr. Nelmes said.
They was very much on the government’s agenda, Dr. Nelmes said.
"There is a dialog internally within the government that such an automatic price adjustment mechanism would be necessary and we believe this is a step in the right direction. It is better to have a stable policy than have stable (controlled) prices. However, we believe the government should target the vulnerable for cash transfers rather than provide outright subsidies to the entire economy and there are examples of successful programmes in other parts of the world," he said.
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