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UPDATE 1-S.Lanka deficit target challenging,but reachable-IMF

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COLOMBO, Nov 20 (Reuters) - The International Monetary Fund (IMF) said on Friday Sri Lanka’s budget deficit targets for both this and next year are challenging due to slow revenue growth, but still within reach.

A visiting IMF mission, after conducting the second review of a $2.6 billion loan programme, said the nation’s post-war economic conditions have improved, but need more reforms in the next two years.

“We see a sign of turn around” Brain Aitken, the mission head told reporters in Colombo. “The budget reforms are the key goals in the next two years. Now that the crisis is basically not a threat, they can focus on tax reforms and expenditure reforms.”

Sri Lanka is increasingly under pressure to cut its budget deficit to 7 percent of GDP by end-2009 from last year’s 7.7 percent, as agreed with the global lender for its $2.6 billion loan approved in July to weather the impact of global financial crisis.

Economists and analysts have estimated the 2009 budget deficit to hit around 9 percent with low revenue growth with the government had said 2009 revenue to fall by 13.5 percent due to the global financial crisis. [ID:nLH601202]

“Achieving the government’s target of reducing the underlying budget deficit 7 percent of GDP in 2009, and further to 6 percent in 2010, will be challenging, but these fiscal targets remain within reach,” the IMF said in a statement.

The $40 billion economy went to the IMF as the last resort after its reserves plummeted around two thirds in the seven months since September 2008 to an eight-year low of $1.27 billion due to withdrawals of foreign funds.

But they have recovered to a record $5.2 billion, as of Monday, due to a surge in foreign inflows -- mainly into government securities -- since the IMF approved the loan.

“With gross reserves now at more comfortable levels, the risk of an imminent balance of payment crisis is no longer present.” the IMF statement said.

The government’s economic policies had so far been in line with the programme and the economic developments had been more favourable than expected at the time of the loan approval, it said.

The IMF expects inflation to remain in single digits in 2010.

The global lender has already cautioned on risks over Sri Lanka’s high budget deficit and borrowed reserves. [ID:nSP436954] (Editing by Chris Pizzey)