Sri Lanka's drought won't hit budget deficit, finance minister says

COLOMBO, March 3 (Reuters) - The worst drought to hit Sir Lanka in 40 years may cost the government up to 40 billion rupees ($264.7 million), but shoud not worsen the fiscal deficit, Finance Minister Ravi Karunanayake said on Friday.

Sri Lanka has already decided to import its staple food -- rice -- after local rice farmers were forced to abandon cultivation due to severe water shortages.

In a investor note on Thursday, Moody’s said weaker economic activity due to drought would weigh on government revenues and forecast the fiscal deficit to rise to 5.2 percent of GDP from and estimated 4.6 percent, “if the negative credit effect of the drought worsens or is not offset by other fiscal measures”.

But Karunanayake said this was not the case.

“We have drafted the budget factoring in those uncertainties. We prepared this year’s budget with stable policies and we added some percentage for these types of incidents,” he told reporters.

“Drought may cost 30 to 40 billion rupees. There are revenue increases taking place. The budget deficit doesn’t need to swell up just because of one abnormal condition,” he said

He also said 2017 economic growth is expected at 6 percent despite the drought.

Achieving the 4.6 percent deficit target this year is one of the main goals under a $1.5 billion International Monetary Fund loan. Karunanayake said the government has not considering for a waiver on the deficit target because of the drought.

Sri Lanka’s consumer price inflation hit a record high of in February pushed up also by the impact of a lingering drought.

Currency dealers say drought has raised imports in the absence of local food production while reduced exports of agricultural commodities have resulted in a decline of dollar earnings, putting pressure on the rupee.. ($1 = 151.1000 Sri Lankan rupees) (Reporting by Shihar Aneez and Ranga Sirilal)