Sri Lanka Budget Keeps to IMF Plan But Fiscals Still Weak

Fitch Ratings-Hong Kong/Singapore-14 November 2017: Sri Lanka’s budget for 2018 sticks broadly to the targets for fiscal deficit reduction under its three-year IMF programme, which began in June 2016. However, high government debt and the large cost of debt servicing weigh heavily on Sri Lanka’s credit profile and will require sustained fiscal consolidation over the long term, says Fitch Ratings.

The recently announced budget targets a fiscal deficit of 4.8% of GDP in 2018, which is only slightly above the 4.7% target agreed with the IMF and continues the consolidation that began in 2016. Floods and drought weighed on the economy and public finances during 2017, and contributed to the government missing its initial 2017 fiscal deficit target of 4.6% of GDP. Nevertheless, the authorities still expect the 2017 deficit outturn to fall to 5.2% of GDP, from 5.4% in 2016. Consolidation in 2017 has been driven by measures to boost tax revenue, including a hike in the value-added tax (VAT) to 15% in November 2016 from 11%.

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