(Adds details, political and economic context)
By Shihar Aneez and Ranga Sirilal
COLOMBO, Sept 25 (Reuters) - The International Monetary Fund (IMF) said on Wednesday it has cut its forecast for Sri Lanka’s 2019 economic growth to 2.7% from 3.5%, as the Easter Sunday attacks on hotels and churches earlier this year dented tourism and broader business activity.
The IMF forecast, which if met would mark the slowest growth in nearly two decades, is also lower than the central bank’s estimate of 3.1%. The last time the Sri Lankan economy faced greater pressure was in 2001, when it contracted following an attack by the Tamil Tiger rebels on the island nation’s main airport.
The IMF had earlier this year already lowered Sri Lanka’s GDP growth forecast to 3.5%, following a protracted political crisis late last year.
The Easter attacks on luxury hotels and churches on April 21 killed over 250 people. Islamist militants have claimed responsibility for the attacks.
“Sustaining prudent policies and implementing institutional reforms remain critical to preserve macroeconomic stability, given the weak global outlook and Sri Lanka’s sizable public debt,” visiting IMF mission chief Manuela Goretti said in a statement.
“The protracted impact of the 2018 political crisis and the Easter attacks are significantly impacting fiscal performance.”
The IMF said Sri Lanka’s end-June fiscal target was missed by a large margin, due to frontloading of spending and externally-financed capital projects carried over from 2018 as well as a sharp fall in indirect revenues following the attacks.
Finance Ministry officials have said Sri Lanka could overshoot its budget deficit target by much as 100 basis points this year, pushing its fiscal deficit to its highest in three years, as spending cuts have failed to offset shortfalls in revenues.
Sri Lanka is under a $1.5 billion, four-year IMF loan programme with the global lender already disbursing $1.16 billion in six tranches.
On the whole, the IMF welcomed the authorities’ commitment to fiscal discipline and institutional reforms.
The $87 billion economy grew at its slowest pace in more than five years from April to June.
Since the Easter attacks, the central bank has cut the key policy rates by 100 basis points, but private sector credit growth, a bellwether of the economy, has yet to pick up.
Growth in 2018 hit a 17-year low of 3.2 percent, due to a political crisis after President Maithripala Sirisena abruptly sacked prime minister Ranil Wickremesinghe and dissolved parliament. That was later ruled unconstitutional, and Wickremesinghe was reinstated. (Reporting by Shihar Aneez and Ranga Sirilal; Editing by Kim Coghill & Shri Navaratnam)