Outlining the road map for 2017 and beyond to achieve an upturn in Sri Lankan economy, the country’s Central Bank Governor Indrajit Coomaraswamy says the island nation is not an ICU case though it is hospitalised. “We are not in the Intensive Care Unit but clearly in hospital,” he remarks. Having an IMF program is the economic equivalent to being in hospital, he remarked three days into the New Year, 2017.
After averting a balance payment crisis with an IMF loan of $1.5 billion, Sri Lanka is working on fiscal prudence.
The three-year IMF loan was provided under the bank’s Extended Fund Facility, (EFF), on certain conditions. These include a 50 percent reduction in the fiscal deficit to 3.5 percent of gross domestic product (GDP) by 2020, lifting the value added tax (VAT), other increases in government revenue and the privatisation of state-owned enterprises.
This is for the second time Sri Lanka has gone in for an IMF bail out to avert BOP crisis. Rajapaksa regime took the first bail out of $2.6 billion in 2009 in the wake of Eelam War that had ended the LTTE scourge.
The budget for 2017 has raised the VAT by 4 to 15 percent on all goods and services, and cut the fertiliser subsidy. Budget rejig covered some social sectors as well in order to keep public spending under check.
Coomaraswamy’s Road Map seeks to administer austerity medicine as fiscal and trade deficits have increased Lanka’s vulnerability in today’s volatile global economic environment. Statistically speaking, trade deficit increased by 3.7 percent to $7.2 bn in the first ten months of 2016 as exports declined by 2.6 percent.
Coomaraswamy expects fiscal austerity to “strengthen the medium term stability” of the economy. He is worried that unsustainable budget deficits boost excess and untenable demand in the economy, and that it would result in inflationary pressures and high interest rates. A higher deficit will further affect the balance of payments as also growth prospects.
The IMF has already downgraded Sri Lanka’s annual GDP forecast to 4.5 percent from five percent.