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C O N F I D E N T I A L SECTION 01 OF 02 COLOMBO 000122 
 
SIPDIS 
 
DEPARTMENT FOR EEB JENNIFER PETERSON AND TANYA SPENCER 
DEPARTMENT OF TREASURY FOR MALACHY NUGENT AND ATTICUS WELLER 
 
E.O. 12958: DECL: 02/18/2020 
TAGS: CE ECON ETRD PGOV
SUBJECT: SRI LANKA BADLY MISSES IMF DEFICIT TARGET; LIKELY 
DELAY IN IMF DISBURSEMENTS 
 
REF: 2009 COLOMBO 1053 
 
Classified By: DCM Valerie C. Fowler fro Reasons 1.4 (b,d) 
 
¶1.     (C)  Summary.  An IMF staff mission currently in Sri 
Lanka is finding that the country has badly missed its 2009 
government deficit target, with the budget deficit reaching 
9.5% of GDP, well over the 7% IMF target.  The IMF staff team 
plans to recommend no further disbursements until Sri Lanka 
gets back on track with the program.  Sri Lanka will have 
Parliamentary elections in early April, and will present its 
budget and tax reform plan in April or May, so we anticipate 
IMF disbursements will be delayed until at least May.  The 
Government of Sri Lanka (GSL) claims that they want to stay 
with the IMF program, but the IMF is unsure of the 
government's true commitment.  Post expects that Sri Lanka 
will seek to keep the IMF program in place, albeit without 
any new IMF disbursements, as long as the GSL can pursue its 
policy objectives without much IMF interference.  End 
Summary. 
 
Sri Lanka Misses Government Deficit Targets 
 
¶2.     (U)  Sri Lanka reached an agreement with the IMF in 
July 2009 to disburse $2.6 billion in eight separate 
tranches, with the provision that the IMF would conduct 
quarterly reviews of Sri Lanka's progress to IMF goals.  Sri 
Lanka agreed to meet government deficit targets of 7% for 
2009, and further reduce the deficit until it reaches 5% in 
¶2011.  The GSL also agreed to increase tax revenue by 2% of 
GDP by 2011.  The IMF has disbursed three tranches, and the 
IMF team arrived in Colombo for their next review on February 
¶16. 
 
¶3.    (C)   The head of the IMF mission, Brian Aitken, 
briefed econoff on February 17 that Sri Lanka's government 
budget deficit would likely reach 9.5% of GDP, well over the 
7% IMF target.  Aitken said that the excess expenditure came 
from capital spending, with the capital projects were already 
in the pipeline, not from new post-war reconstruction 
projects.  Aitken also said that military expenditures were 
flat, so that did not cause the increased budget deficit. 
The IMF is pleased with Sri Lanka's foreign exchange 
reserves, which stand at over $5 billion USD, or six months 
of import cover.  Sri Lanka has not made any progress on tax 
reform. 
 
¶4.    (C)  The exact cause of the increased government 
spending is not clear.  The Central Bank released statistics 
for the first 10 months of 2009, from January to October, 
which show that current expenditures rose by 27% and capital 
expenditures went up 19%, so although revenue rose by 11%, 
the budget deficit through the first ten months was 8.4%.  It 
is possible that capital spending surged in November and 
December, which would also account for the budget deficit 
rising 1% in the last two months. 
 
¶5.    (C)  Although he was only on the second day of the 
review, Aitken said that he plans to recommend to the IMF 
board to delay any additional disbursements until Sri Lanka 
takes substantial steps to get back on track.  Aitken said 
that the IMF staff and board are both skeptical of Sri 
Lanka's commitment to reach the targets, implying that the 
staff recommendation is likely to be followed. 
 
¶6.    (C)   The IMF should know by May if Sri Lanka will move 
toward meeting the targets.  Sri Lanka has not yet presented 
a 2010 budget, because of Presidential elections in January 
and Parliamentary elections in April, but instead is 
operating under a Vote on Account, similar to a continuing 
resolution (see reftel).  The GSL will present its 2010 
budget in April or May.  Moreover, President Rajapaksa has 
appointed a Presidential Tax Commission to make 
recommendations to reform the tax laws.  Econoff heard that 
Presidential Tax Commission is drafting its proposals, which 
will be submitted to the new Parliament in April or May.  The 
GSL could get back on track with an austere 2010 budget, an 
ambitious tax reform, or better yet, both.  The IMF expects 
 
COLOMBO 00000122  002 OF 002 
 
 
to return to Sri Lanka between April and June to assess the 
country's progress. 
 
Will Sri Lanka Stick to the IMF Program? 
 
¶7.    (C)  The GSL has assured Aitken that they are committed 
to the IMF program, but Aitken was not certain.  Central Bank 
Governor Cabraal and Finance Secretary Jayasundera both 
assured Aitken that they will continue the IMF program.  Sri 
Lanka needed the IMF last year because their foreign exchange 
reserves were very low.   Sri Lanka now has over $5 billion 
USD in foreign exchange reserves, amounting to over six 
months of import cover, so they do not need additional IMF 
disbursements to increase their reserves.  The IMF program is 
still valuable to Sri Lanka because it increases the 
confidence of international investors and the ratings 
agencies, and for other international financial institutions. 
 On the other hand, the IMF could interfere with GSL spending 
priorities.  Econoff heard that the GSL plans to sell another 
$500 million in government bonds on international markets, 
and plans to use the money for post-war reconstruction. 
Aitken said that the IMF would insist that any government 
bond revenue should be placed in foreign exchange reserves, 
setting up a possible conflict between Sri Lanka and the IMF. 
 
 
¶8.    (C)  Aitken had an interesting observation on internal 
GSL support for the IMF program.  Central Bank Governor 
Cabraal originally pushed for the IMF program, and he is 
likely to continue to support it.  Finance Secretary 
Jayasundera, who was out of the GSL when the IMF agreement 
was reached, has no stake in the program, and he is likely to 
push for continued spending on large infrastructure projects. 
 In post's view, Jayasundera is closer to President 
Rajapaksa, and he is likely to be the more influential 
advisor in a difficult situation. 
 
¶9.    (C)  Comment.  Although Sri Lanka does not need the IMF 
disbursements to build up its foreign exchange reserves, post 
expects that the GSL will continue the IMF program in order 
to bolster investor confidence up until the point that the 
IMF program interferes with an important GSL goal.  The GSL 
economic strategy has championed state-led economic 
development, featuring huge infrastructure projects, and GSL 
officials have been disdainful toward Western neo-liberal 
economics.   We do not believe that the GSL will alter its 
priorities to satisfy the IMF.   Therefore, the IMF program 
is likely to continue, without any further IMF disbursements, 
until there is a real conflict between the GSL and the IMF. 
End Comment. 
BUTENIS