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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » Risks On The Rise – IMF

Risks On The Rise – IMF

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1Risks On The Rise – IMF Empty Risks On The Rise – IMF Thu May 14, 2015 9:59 am

Melissa Pereira


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
Although Sri Lanka’s macroeconomic performance had been commendable, future outlook is plagued by downside risks cumulative of lower public and private investment, uncertain policy environment, crowding out of private sector credit, and the potential for negative spillovers from slower economic recovery in Europe, International Monetary Fund warned this week.
“Recent macroeconomic performance has generally been strong but risks appear to be on the rise. Real GDP growth registered 7.4 per cent in 2014. Growth was broad-based, with the exception of agriculture which suffered from drought early in the year, heavy rains and flooding in the fourth quarter. Price pressures have been contained, with headline and core inflation declining to 2.1 and 1.2 per cent, respectively, by the end of the year. Reductions in administered prices for fuels facilitated the record low levels of inflation.
Preliminary data indicate the 2014 fiscal deficit exceeded the budget target by about 1 percent of GDP, as spending cuts were unable to compensate for a further decline in the tax revenue-to-GDP ratio.
This is the first year since 2009 that the deficit was not reduced as a share of GDP. Monetary policy has been accommodative, with private sector credit showing signs of recovery late in the year. The external current account was broadly stable in 2014, with stronger tourism and remittances partially offsetting a wider trade deficit as goods imports recovered in the second half of the year. For the year as a whole, the Central Bank of Sri Lanka managed to accumulate foreign exchange reserves of $721 million.”
The outlook is broadly stable but set against heightened downside risks. Real GDP growth is projected at 6.5 percent in 2015 and beyond – in line with IMF staff’s estimate of potential output. While there is considerable growth momentum, downward pressure may emerge from such factors as lower public and private investment due to budget cuts and an uncertain policy environment, a crowding out of private sector credit, and the potential for negative spillovers from slower economic recovery in Europe – one of Sri Lanka’s two most important export markets.
The fiscal deficit is a key concern for 2015 and the medium-term. The 2015 deficit target will likely be very difficult to reach even with relatively optimistic assumptions regarding revenue gains. Further, in the absence of new measures to create a more durable increase in tax collection, revenues in 2016 will drop as the one-off measures expire, while the permanent increase to recurrent spending from the revised 2015 budget will likely push the deficit higher – raising the level of risk to debt sustainability.
The external sector outlook for 2015 appears favorable, but there are several risks. The sharp drop in oil prices will likely generate a substantial windfall for Sri Lanka’s import bill – equivalent to about $2 billion for 2015 as a whole. Assuming goods exports remain in the current range, the improvement in the trade balance should provide a cushion to the overall balance of payments and allow for further accumulation of central bank foreign exchange reserves. With capital flows at comparatively normal levels, net inflows should be sufficient to keep central bank foreign exchange reserves in the range of around 4 months of imports. However, risks to this outlook include (i) an eventual reversion of the oil price shock; (ii) a slowdown in goods exports in the event growth in key export markets stalls; and (iii) less optimistic assumptions regarding net capital flows.
Even though outstanding borrowing from the IMF has fallen below 200 percent of quota, IMF staff recommends continuing post-program monitoring until the fiscal and external positions strengthen, and a medium-term package of policies is in place.
IMF Directors welcomed Sri Lanka’s recent favorable economic performance, including robust growth, low inflation, and a narrowing of the current account deficit.
At the same time, they noted that fiscal risks and reduced external buffers pose challenges, underscoring the need for greater efforts to strengthen the policy framework and reduce vulnerabilities.
Directors welcomed the authorities’ commitment to fiscal consolidation. However, they noted with concern that the deficit target under the revised 2015 budget relies to a large extent on one-off revenue measures. Given the risks associated with the high public debt, Directors urged the authorities to adopt more ambitious measures to contain current expenditure while protecting priority social and high value-added infrastructure spending. They emphasized that a strengthening of the fiscal framework is needed to support consolidation and debt reduction. Comprehensive tax policy and administration reforms, including tax expenditure reductions and simplification of the tax system to broaden the revenue base, will be crucial elements in a medium-term fiscal reform strategy.
Directors noted the resumption of private credit growth following monetary easing in 2013-14. They advised close monitoring of credit and inflation developments, given the potential turn in the credit cycle and long lags in monetary transmission. They stressed that it is important to be prepared to act if signs of overheating emerge.

Directors welcomed the authorities’ efforts to address weaknesses in the external sector, including plans to establish new swap lines and rebuild external reserve buffers. In this context, they underscored the importance of exchange rate flexibility in protecting international reserves and facilitating external adjustment. Further structural reforms will also be needed to raise productivity and improve the business climate and competitiveness.
Directors welcomed the reduction in banks’ nonperforming assets and the authorities’ efforts to bolster supervision and regulation. They highlighted the need for a strong supervisory and clear crisis management framework to be extended to the nonbank sector.
They encouraged the authorities to move expeditiously to provide clarity to markets regarding financial sector consolidation.
Directors agreed to extend post-program monitoring in light of risks and the desirability of maintaining a close policy discussion between the authorities and the Fund. Directors looked forward to the new government’s comprehensive economic policy agenda.

Courtesy: The Sunday Leader 14 May 2015

2Risks On The Rise – IMF Empty Re: Risks On The Rise – IMF Thu May 14, 2015 1:45 pm

Senior Citizen

Senior Citizen
Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
Excess liquidity is an indication that the private sector is not being massaged enough with increase in productivity, start ups, capacity expansion and development.

I don't know the extent of new start ups during 2014 and 2015. Very few compared to the previuos years. Also the investors are shy of share issues and IPO's.

3Risks On The Rise – IMF Empty Re: Risks On The Rise – IMF Fri May 15, 2015 5:02 am

Teller

Teller
Moderator
Moderator
Actually senior citizen, i am also thinking the same. what happend to IPOs, I am looking for a good IPO but no chances in this year. Why?????


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Teller said is said..

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