IMF wants strong budget narrower deficit from Sri Lanka

The International Monetary Fund (IMF) is looking for a strong budget and narrower deficit from Sri Lanka as it seeks funding to bridge the gap between government revenue and expenditure, the IMF mission chief said.

Sri Lanka plunged into its worst financial crisis in seven decades last year after its foreign exchange reserves dwindled to record lows. Still, since locking down a $2.9 billion IMF program in March, it has partially stabilized its economy, reducing runway inflation and rebuilding reserves.

However, the country has struggled to increase public revenue, with the IMF projecting a 15% shortfall this year.

An improved performance for next year is necessary for Sri Lanka to get past the first review of its program with the global lender.

Sri Lanka reached a staff-level agreement with the IMF late Thursday to release the second tranche of about $330 million but still needs approval from the IMF management and Executive Board.

Regarding revenues, Senior Mission Chief for Sri Lanka Peter Breuer said the objective is to keep a shortfall from happening next year and ensure income exceeds 12% of GDP.

“Like, approximately 12 months ago, we are, of course, looking for a strong budget that can achieve that with, of course, the objective being that the gap between expenditure and revenues needs to be narrowed so that Sri Lanka can, once again, find creditors who are willing to finance the remaining gap,” Breuer told reporters at an online briefing from Washington.

Sri Lanka typically funds its budget through borrowings from state banks, taxes, and government securities.

The power regulator approved an 18% electricity tariff hike for households in the country with effect from Friday, part of efforts by Sri Lanka to improve the revenue of its state-run power monopoly, the Ceylon Electricity Board.
Sri Lanka increased tariffs by 65% in February before reducing them by 14% in June.

Analysts said the power tariff hike is expected to partly increase the island’s inflation from 1.3% in September to about 5% by December.

Meanwhile, state media said that China offered to help Sri Lanka buy more of its exports after leaders of the two countries met in Bejing on Friday.

This comes a week after the island nation said it had reached an agreement with the Export-Import Bank of China on $4.2 billion of debt.