By C. Bryson Hull | Reuters
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The IMF released a delayed $408 million loan tranche right before the budget was presented, saying the spending plan would "significantly address past fiscal slippages" if executed.
Here are some questions and answers about the budget impact:
THE 2010 BUDGET DEFICIT FORECAST IS FOR 8 PERCENT OF GDP, AGAINST AN IMF TARGET OF 7 PERCENT. WILL THAT CAUSE SNAGS IN FUTURE DISBURSEMENTS OF THE LOAN?
Not really, as long as the government is acting in the spirit of the reforms pledged under the $2.6 billion loan. The global lender has been accommodating to Sri Lanka, as it views it as a success story since the end of the war.
Sri Lanka's government recognises that is has a once-in-a-generation opportunity to reform the economy after nearly three decades of war, so it has greater incentive to act than nearly any other previous administration.
WHAT ABOUT GOVERNMENT BORROWING?
It's down 7.8 percent overall. Total domestic financing this year is forecast at 315.3 billion rupees, down from 392.5 in 2009, while foreign financing is estimated at 123.5 billion versus 83.9 billion last year.
Lower domestic financing means interest rates in Sri Lanka should remain low for the near term and help a nascent rebound in private sector credit growth. Foreign investors who want Sri Lankan government securities still face a 10 percent foreign holding limit that is all but topped out. [nSGE64H0F7]
WILL REFORMS IN THE PUBLIC SECTOR BECOME A REALITY?
Like the IMF said, it is all about execution. The budget speech announced the creation of a new Ministry of Management Reforms to make the public sector a revenue generator.
The ministry faces a tall order in creating efficiency and accountability in a bloated, notoriously slow-moving public sector that remains a major source of patronage. Many are sceptical Rajapaksa will resist the temptation to dole it out.
WHAT ABOUT THE EXPECTED TAX REFORMS?
A number have been announced over the last month, so the budget had nothing new. But a presidential commission tasked with streamlining the tax structure is expected to announce its recommendations by August. Look for the panel to propose a simplified personal and corporate tax regime, replacing one that is a byzantine, costly mix of Sri Lanka's history as colonial trading outpost and a post-independence socialist state.
© Reuters
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