Friday, October 8, 2010

IMF says economy to grow 7% this year


* A little lower than Sri Lanka’s official estimate


By Devan Daniel in Washington D.C.

The IMF said Sri Lanka’s economy is expected to grow by 7 percent in 2010 and 2011 and projects economic growth to be around 6.5 percent in 2015. In April this year, the IMF estimated that the economy would grow by 5.5 percent in 2010, which means it has revised upwards Sri Lanka’s growth forecast for this year.

However, this revision is lower to what the Central Bank has estimated. The bank recently revised its growth forecasts to between 7.5 to 8 percent and expects growth would be sustained around the 8 percent levels in the medium term. This revision came after a robust second quarter growth which was 8.5 percent.

The IMF has also projected that the economy would grow by 6.5 percent in 2015 while the government hopes per capita income would double to US$ 4,000 by then, which means private sector credit flows would have to double from the current level of Rs. 1.6 trillion.

"I cannot comment on the differences between our (IMF) forecast for growth that with your Central Bank’s but what I can say is this, while it is true the conflict in Sri Lanka is over and growth prospects are good, our projections are based on the fact the economy was hit badly by the (30-year) conflict," Rupa Duttagupta, Deputy Chief in the World Economic Studies Division of the Research Department, told The Financial Review at the launch of the IMF flagship publication ‘World Economic Outlook: Recovery, risk and rebalancing’.

"Infrastructure development is weak and needs to move up some more and Sri Lanka has a programme with the IMF which is moving well," she said.

Although lower than Sri Lanka’s estimates, the IMF’s 7 percent growth forecast is an improvement from a previous estimate. Last April the IMF said Sri Lanka’s post war economy was expected to grow by 5.5 percent this year but warned fiscal consolidation must take place for mid to long term sustainable development.

Sri Lanka’s budget deficit ballooned to 9.9 percent of GDP in 2009, missing a 7 percent target under the US$ 2.6 billion standby facility programme with IMF. This resulted in a delay of a disbursement of tranches until the government articulated its commitment to fiscal consolidation under the programme. However, with the mini budget for this year the IMF has resumed the programme and Sri Lanka has met its targets for September.

So far, under the programme, Sri Lanka has received five tranches, totaling US$ 1,275 million, out of the total facility of US$ 2,600 million.

An IMF staff mission is expected in November 2010 to conduct the next review and the sixth tranche is expected to be released soon after the review is successful.

After resuming the programme with the IMF after a brief pause earlier this year, the government has sent the IMF a new letter of intent outlining its policies for the next few years. According to the new Letter of Intent, the government has said the following measures would be taken:

It said the BOI incentive regime would be rationalised by reducing excessive concessions, and concentrating on large investment projects with a sizable component of foreign funds.

"The consultative process already started is moving forward for the new regime to be implemented from the beginning of 2011. Taking the Presidential Tax Commission’s final recommendations submitted to the President recently, the government would formulate a new investment incentive regime to be implemented along with a rationalisation of the tax system and for trade taxes," the Ministry of Finance letter to the IMF said.

The electricity tariff would be rationalised in 2011 to move the Ceylon Electricity Board towards breakeven. "The government is also committed to dealing with the non-performing debt of state owned enterprises, and in particular the Ceylon Electricity Board would restructure its overdue obligations accumulated up to end 2009 to the Ceylon Petroleum Corporation by end 2010. We remain committed to move the joint operational balance of both state enterprises to breakeven in 2011,"

The Ministry of Finance told the IMF that the implementation regulations for the proposed deposit insurance scheme under the Monetary Law Act covering all licensed banks and finance companies would be issued by the end of this month. It is also seeking cabinet approval of a regulatory framework for private sector superannuation funds by empowering the Insurance Board of Sri Lanka by end December 2010, by which time amendments to the Banking Act would also be submitted to parliament.

The Ministry of Finance said the government was committed to achieving a budget deficit of 6.8 percent of GDP in 2011 and 5 percent in 2012. The government is hoping tax revenues would improve up to 16.5 percent of GDP by 2012 from 15.5 percent in 2011 while recurrent expenditure is expected to some down by half a percent in 2011.

According to Central Bank data, the budget deficit for the first seven months of this year had contracted by 8.22 percent to Rs. 264.6 billion from Rs. 288.3 billion recorded during the corresponding period of last year.

Tax revenue grew by 18.29 percent to Rs. 372.4 billion from Rs. 314.8 billion from a year ago. Non tax revenue increased by 77.7 percent to Rs. 52.6 billion from Rs. 29.6 billion while grants declined by 50.99 percent to Rs. 7.4 billion from Rs. 15.1 billion.

Recurrent expenditure grew slower than revenue growth at 8.96 percent reaching Rs. 550.4 billion, as against Rs. 505.1 billion for the corresponding period of the previous year.

Capital expenditure, or long term public investments, grew by 2.73 percent to Rs. 146.6 billion from Rs. 142.7 billion.

According to The Island Financial Review estimates, the deficit for the first seven months of this year amounted to 4.85 percent of GDP, an improvement against the 5.97 percent deficit for the corresponding deficit of last year.

source - www.island.lk

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