The International Monetary Fund (IMF) said Sri Lanka’s performance under its Extended Fund Facility (EFF) “broadly satisfactory” and praised the Government for exceeding targets in revenue collection but warned increasing external vulnerabilities could affect growth targets and warrant fresh tightening of rates in 2017.
“Sri Lanka’s performance under the Fund-supported program has been broadly satisfactory despite challenging circumstances. Macroeconomic and financial conditions have begun to stabilise, inflation has trended down, and the balance of payments has improved. Meanwhile, international reserves remain below comfortable levels,” head of the IMF staff team Jaewoo Lee told reporters.
He said, complementary structural reforms in tax administration, public financial management, and the governance and oversight of state-owned enterprises are critical for durable fiscal consolidation. He also pointed out that Sri Lanka’s structural reforms have been moving slower than expected and warned that long term and sustainable fiscal consolidation would be difficult without them.
It went on to state that consistent with the program, the authorities pledged that the 2017 budget would aim at a primary balance. Complementary reforms in the income tax system, public financial management, tax administration, and oversight on state-owned enterprises are critical for durable fiscal consolidation. Monetary policy tightening this year has helped contain in flation pressures. While inflation has shown early signs of abating, credit growth remains robust and warrants further monitoring. Given the large external liabilities, the authorities should further accumulate international reserves mainly through direct purchases of foreign exchanges, while maintaining a firm commitment to greater exchange rate flexibility.