Sri Lanka’s budget includes plans to strike an IMF deal; markets not enthusiastic
COLOMBO, Nov 14 (Reuters) – Sri Lanka’s struggling economy could recover by the end of 2023 if fiscal policies, which go beyond recommendations from the International Monetary Fund, are followed, the government said on Monday. President Ranil Wickremesinghe.
IMF recommendations were only considered to stabilize the economy, Wickremesinghe, who is also the country’s finance minister, told parliament as he presented the first annual budget since taking office in July.
The budget included measures to reduce the government’s deficit as Colombo seeks an IMF bailout to help the country recover from its worst financial crisis in decades.
Rampant inflation, a weakening currency and low foreign exchange reserves have left the island of 22 million people struggling to pay for imports of essentials such as food, fuel and medicine.
Massive unrest forced the former president and prime minister from power, and the country remains vulnerable to political instability as fears of a global recession have compounded problems in an economy that has suffered a contraction. catastrophic.
Wickremesinghe has set several medium-term goals for the government: to increase international trade as a percentage of GDP by more than 100%, an annual growth of $3 billion in new exports over the next 10 years as well as attracting $3 billion dollars of foreign direct investment over the same period.
He also said the government plans to reduce debt to less than 100% of GDP in the medium term and achieve economic growth of around 7-8%.
“With many taxes already in place, on the revenue side, the budget appears to be primarily aimed at tax administrations, reducing leakage and widening the tax net,” said Trisha Peries, head of research at CAL Group.
Sri Lanka’s international bonds have shown little impact since the last announcements.
Some issues gained as much as 1.6 cents on the dollar, but that was broadly in line with broader market moves and the country’s dollar bonds are still offered at deeply distressed levels of 23 to 25 cents, according to Tradeweb.
“We expected more targeted policies,” said Dimantha Mathew, head of research at investment firm First Capital.
Mathew said debt restructuring would be a crucial short-term solution to the island’s problems, but reforming loss-making state-owned enterprises, which was included in the budget, would be key to getting the economy back on track longer. term.
STRENGTHENING THE IMF
Analysts also said tax collection would be vital for the country as it was unlikely to be able to massively cut spending in a bid to fund welfare schemes, while the government’s ability to honor its interest payments will also be monitored.
The World Bank estimates that Sri Lanka’s economy will contract by 9.2% in 2022 and 4.2% next year.
Sri Lanka’s economy could recover in the “last part of 2023”, the central bank said recently, adding that it would depend on policymakers implementing reforms quickly and effectively.
Sri Lanka signed a staff-level agreement with the IMF in early September, but needs to obtain funding assurances from several creditors, including China and Japan, to secure disbursements.
An agreement with the IMF is also essential for Sri Lanka to be able to access bridge financing from the World Bank and other multilateral sources if it is to have enough foreign exchange to pay for imports.
After stabilizing the economy, the government must bring it back to growth or risk a repeat of the political unrest that forced President Gotabaya Rajapaksa to flee the country and resign in July.
“At the moment, I think the government has taken the right steps to reach an agreement with the IMF, but public enterprise reforms and expenditure management are going to be something that must be prioritized just as much as tax collection. “Peries said. said.
Reporting by Uditha Jayasinghe; Written by Swati Bhat; Editing by Simon Cameron-Moore, Emelia Sithole-Matarise and Alex Richardson
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