Above-expectation growth balanced with risk: IMF

Saturday, 31 May 2014 00:00 - - {{hitsCtrl.values.hits}}

Threats have reduced by not changed, debt must decline
Want tax structure reformed and revenue increased
Calls for reduced debt in energy corporations, tightened spending
Financial sector consolidation must be partnered with better corporate governance

Little has changed in Sri Lanka’s outlook, with the International Monetary Fund (IMF) yesterday saying economic growth has “exceeded expectations,” while calling for increased revenue collection and reduced debt, releasing its Article IV consultation report. Sri Lanka’s real GDP growth reached 7.3% and inflation declined to 5% in 2013. The IMF noted external current account had strengthened, supported by a robust recovery of export goods as well as solid growth in services and remittances. “Near term outlook appears positive, aided by a recovery in advanced economies. The IMF projects real growth to continue at around 7% and inflation to remain close to current rates in 2014. Strong export growth is likely to continue and may facilitate a further reduction of the external current account deficit, leaving room for additional accumulation of international reserves by the Central Bank,” Mission Head Todd Schneider told reporters. He also voiced concern that while risks have reduced they have not changed with only positives of developed economies trickling down. Steady progress on fiscal consolidation and reduction of public debt is a linchpin of macroeconomic stability in Sri Lanka and a critical factor in maintaining policy credibility and confidence, Schneider observed. IMF also welcomed containing the deficit to 5.9% in 2013 and the Government’s commitment to further reducing it to 5.3% of GDP this year. Nonetheless it insisted that these goals require the Government to tighten spending and implement structural reforms such as reducing debt in State-owned energy corporations, extending VAT coverage while reducing the threshold, automation of tax collection and better public financial management. In addition, low tax revenue mobilisation remains an issue, especially given the high debt level of the Sri Lankan Government, which is still close to 80% of GDP as well as the shift from concessional borrowing to more expensive commercial loans. The IMF also pointed out sufficient fiscal room is also needed to meet long term social and infrastructure development needs while still reducing the public debt to GDP ratio. Current monetary policy was deemed appropriate but IMF cautioned a continued forward looking approach to monetary policy is needed together with close monitoring on possible price pressures. “Sri Lanka has been resilient to tapering pressures and is likely to remain so in 2014. Short term risks appear moderate and are most closely linked to the recent brought and the impact of a weak monsoon and the balance of payments,” the IMF added. Medium term risks are linked to slower than expected global recovery, an unexpected potential tightening of external liquidity which could affect roll-overs and borrowing costs and slower than projected gains in revenue. Ongoing financial sector consolidation offers a potential opportunity to increase the resilience of monitoring systems, the IMF stressed. The Mission highlighted that restructuring of operations would be key to achieving efficiency gains and that it would be important to ensure that mergers are accompanied by continued progress on corporate governance. Identifying and mitigating risk factors which may limit potential efficiency gains both during and after the implementation process will be key to creating a financial system that is efficient, profitable and best serves the needs of a growing economy.

No discussions on education policy

The IMF confessed it was “perplexed” by the reference to an alleged agreement that it has with the Government to reduce funding for education and insisted there was no such involvement. Mission Head Todd Schneider responding to questions from the media was adamant that there had been no discussions regarding education with the Sri Lankan Government. “Our job is to oversee monetary policy we don’t talk about education policy. We believe that continued public investment in education is vital and we actually encourage the Government to have more room to increase spending on education,” he said. Opposition Leader Ranil Wickremesinghe recently told a group of academics the Government is reducing spending on public education in part because of an agreement it has signed with the IMF. He was also reported as pledging to abolish all IMF agreements if a UNP Government comes into power.

Avoid tax holidays

The IMF also recommended the broadening of the tax base as an essential mode of boosting Government revenue, highlighting tax holidays and tax exemptions given to foreign investments as a major loophole. Sri Lanka, while grappling with a three-decade war, used tax holidays and exemptions of 10 years or more heavily to attract foreign investment. Since the end of the war in 2009 large-scale projects still continue to be given significant tax holidays. Since 2008 Sri Lanka has given 17 projects multi-million dollar tax concessions that can last up to 25 years or more with the latest being tax concessions for hotel projects that could house casinos. These include a $ 350 million project by Australian gaming mogul James Packer, which the Australian Review estimated would give $ 1 billion extra revenue over the period of 12 years. “Tax holidays and tax exemptions make it harder to administer taxation. This is a hole that needs to be cleared up as it would also help expand the tax base,” said Mission Head Todd Schneider.