IMF urges Sri Lanka reforms to get loan moving again

By Shihar Aneez - The International Monetary Fund urged the Sri Lankan government on Wednesday to speed up fiscal reforms and produce a more comprehensive deficit cutting plan if wants to get a multi-billion dollar loan back on track.

"The disbursement of the next tranche (of the loan) is linked most importantly with the budget," Koshy Mathai, the IMF resident representative for Sri Lanka, told Reuters in an interview.

"What we looking for is the budget and meaningful steps towards reducing the deficit, and also doing it in an economically sensible way, raising revenue in a sustainable way, introducing sensible tax reforms and cutting inefficient expenditures."

Mathai said the IMF was not demanding immediate results today or tomorrow but wanted to see a firm plan over the medium term.

The IMF in February delayed the release of a third tranche of the $2.6 billion loan after the government overshot its 2009 budget deficit target. The shortfall rose to an eight-year high of 9.7 percent, according to the finance ministry, well above the original target of 7 percent.

The IMF had said it would disburse the next tranche if Sri Lanka lays out concrete plans for fiscal consolidation in its budget after the April elections. The loan was approved last July to help Colombo avert a balance of payments crisis.

But the government said last week it would only introduce fiscal reforms including tax changes in its 2011 budget, not this year's as it had previously pledged.

Economists and analysts say the IMF loan is important in maintaining investor confidence in the $40 billion economy as the country works to recover from a 25-year civil war.

Mathai said Sri Lanka's fiscal position remained weak, raising concerns about its economic stability in the medium term.

"This could bring pressure on inflation and the exchange rate, crowd out investment and private sector credit, drive up interest rates and lead to a reliance on volatile foreign borrowing," he said.

The government has said it will adopt a mini-budget for 2010 covering the rest of the year from mid-July. Since January, it has been relying on an interim budget and a $3.9 billion spending plan authorised by President Mahinda Rajapaksa.

Government officials said the mini-budget will have both expenditure and revenue proposals.

An IMF mission is expected in Sri Lanka next week to discuss with the government how to proceed with the loan programme if the budget is further delayed, Mathai said.

"What we understand is that the mini-budget also may contain tax reform proposals, even if some technical work remains and those proposals are implemented only later," he said.

© Reuters