IMF urges return to political stability

The International Monetary Fund (IMF) this week urged the government to tighten macroeconomic policies and a return to political stability saying this was crucial to sustain the economy.

In a statement, the IMF said its directors called for a determined effort to reduce the fiscal deficit to five percent of GDP by 2010-11 as planned. “This will be essential to ensure public debt sustainability and to create space for productive and social investment. Revenue mobilisation and current expenditure rationalisation should be key elements of the adjustment effort. In particular, directors underscored the importance of streamlining tax exemptions, broadening the income and value added tax base, simplifying the value added tax, and strengthening tax administration,” the statement said.

The statement was issued on Thursday following the November 21 conclusion of an Article IV consultation with Sri Lanka by the IMF’s Executive Board. The IMF closed its office in Colombo last February but has been regularly sending review missions to Sri Lanka.

It said revenue grew by 25 percent in the first half of 2007, but it was still at about 40 percent of the ambitious annual target. Wages and military spending have been contained as of June, but they could continue to be key fiscal risks in the period ahead.
“For the year as a whole, healthy exports and remittances are expected to be largely offset by the implementation of mega infrastructure projects and high oil prices since July,” the statement said.

The IMF said the Ceylon Electricity Board (CEB) is likely to incur financial losses of about Rs 20 billion (¾ percent of GDP) in 2007, due primarily to the lack of adjustment in electricity tariffs, which have fallen well below cost recovery levels. A large part of these losses was financed by loans from public banks, posing risks to the financial sector.