Sri Lanka's budget deficit and debt levels are too high and renewed civil war with Tamil Tiger rebels is holding back the island's $26 billion economy, a top World Bank official warned on Thursday.
"Sri Lanka's economic growth is slowing and it needs to address important macroeconomic imbalances. The rate of inflation is approaching 20 percent, and the government budget deficit and debt levels are too high," Graeme Wheeler, World Bank Managing Director, said on a visit to Colombo.
"The government spending is driven by debt servicing expenditure, because of the high debt and those expenditure related to security," he said. The total outstanding debt rose to 2,937.9 billion rupees ($26.6 billion) up to end of August this year, an 11.3 percent increase from early January, central bank data showed.
The security expenditure has increased sharply to around 20 percent of the country's annual budget, due to ongoing heavy fighting between the state and Tamil Tiger rebels, who are fighting for a separate land for minority Tamils. "Conflict is an enormous burden to both Sri Lankan people and the country's longer-term economic prosperity," Wheeler said.
Sri Lanka's ministry of finance has forecast the country's budget deficit will narrow to 7.9 percent of GDP in 2007 from 8.4 percent in 2006, while government debt will fall to 86.5 percent of GDP in 2007 from 93 percent last year.
"Inflation needs to be addressed, fiscal position needs to be improved, and the country still has a significant current account deficit. So there are some difficult and challenging economic adjustments needed on the policy sides," Wheeler said. Sri Lanka's widening current account deficit stood at $1.334 billion in 2006 from $651 million a year earlier, and was 4.9 percent of GDP, the central bank said.
Sri Lanka's annual inflation rate, measured on a 12-month moving average, rose to a 17-year high of 17.5 percent in October, the government said on Wednesday. "It (inflation) is way above its trading partners' and essentially means that your real exchange rate is appreciating. in other words, you are losing competitiveness," Wheeler added.
Despite inflation being high, the central bank left its policy rates unchanged for an eighth month in a row last Friday, with the repurchase rate kept at 10.5 percent and the reverse repurchase rate at 12 percent.
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