Reduce Jumbo Cabinet To Check Expenditure-I.M.F. Rep.

An economist said that the benefits of the war end should be translated into the Government of Sri Lanka’s (G.o.S.L.’s) fiscal numbers,  with a complementary  reduction in defence expenditure assisting in fiscal consolidation, coupled with a decrease  in G.o.S.L.’s large Cabinet, a charge he attributed to having had been made by the media.
Koshy Mathai, I.M.F.’s Resident Representative in Colombo delivering a lecture on “fiscal sustainability” on Thursday also called for the rationalization of public expenditure and the need to improve the performances of state owned enterprises to bring down the budget deficit.
The I.M.F. recently suspended the payment of the third tranche of U.S.$ 325 million in their U.S.$ 2.6 billion standby arrangement  with G.o.S.L. due to budgetary over-runs,  till the presentation of Budget 2010 expected after next month’s parliamentary elections.
G.o.S.L. in their agreement with the I.M.F., pledged to contain last year’s budget deficit at 7% of g.d.p. It however overshot this target by 2.7 percentage points to end the year with a fiscal deficit of 9.7%.
Central Bank of Sri Lanka (C.B.S.L.) Governor Ajith Nivard Cabraal recently told reporters that the reason why G.o.S.L. over-shot this target was due to expenditure incurred in re-settling the displaced in the North and East.
Mathai also said that that checks on public debt and the fiscal deficit are imperative to give a government space during bad times.
However Sri Lanka’s debt to g.d.p. ratio increased from 81% to 85% of g.d.p. year on year (y.o.y.) last year.
He further said empirical evidence has shown that high levels of public debt and fiscal deficits crowd out the private sector from the credit market, which in turn hits investments and therewith job creation.
Sri Lanka, for the first time saw credit to the private sector contract, by 4% y.o.y.  last year.
Cabraal speaking to reporters recently said that credit has picked up since last month and expected recovery to take place after next month’s elections
Mathai said that there was evidence to suggest that if public debt grows by 1% of g.d.p., interest rates would increase by 3-5 basis points (b.p.s); sustained deficits of 1% or higher, interest rates would then rise by 20-30 b.p.s. and if the deficit is 5% higher, then interest rates would increase by 270 b.p.s.
He attributed the chief reason for the rise in public debt to high interest costs, with Treasury (T) Bill yields going upto 17% and beyond last year. T Bill yields currently are in the single digit levels.
The I.M.F. representative said that it was because of the availability of this fiscal space-containable fiscal deficits and public debt, that enabled developed economies to provide for the necessary fiscal stimuli to their economies to tide over the recent global financial crisis.He also said that sustainability in reserves comes, if growth is generated through exports and remittances, in that aspect the latter was growing in Sri Lanka. However growth in reserves due to foreigners subscribing  to T Bills is fickle, because that money could also go out the same way. Mathai further said that tax revenue at 14-15% of g.d.p. was too low, made worse by a complicated tax system. Reforms in the tax system were however expected. G.o.S.L. also gave a pledge to the I.M.F. that tax revenue will increase by 1% of g.d.p. y.o.y. this year.