* End-July targets met but fiscal pressures remain; monetary policy appropriate for now says Dr. Koshy Mathai
As the country’s fiscal policy comes under pressure this year, the International Monetary Fund (IMF) is drawing comfort from the government’s pledge to stay committed to the year-end budget deficit target.
The government has met the end-July target under the IMF programme for net domestic financing of the budget but pressures on fiscal performance are likely to remain, IMF Sri Lanka Resident Representative Dr. Koshy Mathai told The Island Financial Review.
The Central Bank on Wednesday said that all end-July targets under the US$ 2.6 billion standby arrangement were met.
"Available data do suggest that the end-June targets on net international reserves at the Central Bank, reserve money, and net domestic financing of the budget were met," Dr. Mathai confirmed.
The budget deficit for the first four months of this year reached 3.8 percent of GDP, raising concerns that the government could miss the 6.2 percent target for the whole of this year.
"Some analysis of year-to-date fiscal performance offered in the press are overly simple; one cannot just take the first four months deficit and multiply by 3, but it is nonetheless true that the budget will face pressure this year on account of slower growth and lower imports, both of which will dampen revenues, as well as higher interest rates, which will raise the government’s financing costs," Dr. Mathai said.
"We will watch the data carefully but take comfort in the authorities’ repeated public statements of their commitment to achieving the annual deficit target of 6.2 percent of GDP," he said.
Treasury Secretary Dr. P. B. Jayasundera reiterated on Wednesday that, "The commitment of the government to keep the Budget deficit at 6.2 percent of GDP will be realised by a greater concentration on revenue collections and expenditure commitment control on the budget provisions."
On the monetary policy front, the Central Bank on Wednesday kept policy interest rates unchanged despite inflation peaking at 9.3 percent in May, with money market rates also increasing.
"On monetary policy, we have no issue with the Central Bank’s decision to leave rates unchanged for the time being. Monetary policy always has to be forward looking. And while measured inflation has gone up sharply in the past few months, this was largely expected given the policy adjustments earlier this year and, we think, mostly reflects a one-off increase in the price level rather than an increase in inflationary momentum," Dr. Mathai said.
"If evidence of so-called ‘second-round’ effects emerges, whereby price levels throughout the economy continue to increase, then no doubt the Central Bank could re-evaluate its policy stance," he said.
The IMF has forecast inflation to reach near 10 percent by the end of this year.
The US$ 2.6 billion standby arrangement almost fell apart last year when the Central Bank continued to sell down reserves to defend the rupee despite a concerning expansion in the trade account deficit.
Earlier this year, authorities were compelled to introduce a slew of measures in order to deal with the balance of payments problem, which were commended by the IMF.
The last tranche amounting to around US$ 450 million under the programme is expected by the end of this month and the government is in talks with the IMF for a follow up programme for around US$ 500 million.