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Source: Reuters

INTERVIEW-Sri Lanka may miss 2010 IMF deficit goal

Published: 23 Feb 2010 02:31:07 PST

COLOMBO, Feb 23 - Sri Lanka's 2010 budget deficit target for 2010 set by the International Monetary Fund as a condition for a $2.6 billion loan will be challenging to meet due to high post-war government spending, the central bank chief said.

Sri Lanka, which ended a 25-year war in May last year, promised to cut its fiscal deficit to 6 percent of gross domestic product this year.

"It's challenging." Governor Ajith Nivard Cabraal told Reuters on Tuesday. "The commitment is there. At the same time there may be areas where have to recognise that there is huge expenditure because we are in a post-conflict era."

He said the extra spending will help to achieve political stability.

"Long-term political stability is essential for us and sometimes we may have to sacrifice short-term gain. So that's the trade off."

The central bank has already acknowledged that the $40 billion economy has likely missed last year's budget deficit goal of 7 percent set by the IMF.

Since the end of the war, Sri Lanka has attracted more than $1.6 billion in foreign investment into government securities and $500 million into a sovereign bond. However, foreign direct investment is down close to 2006 levels.

"Last year the FDIs were in the range of around $600 million. In the context of the global situation we shouldn't get discouraged by that," Cabraal said.

The central bank is not considering to increase the limit of foreign investments in government securities from 10 percent, but foreigners can invest in more than $400 million worth of development bonds, which are likely to be rolled over this year, he said.

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