Economy expected to return to a high and inclusive growth trajectory

The IMF  released the ‘staff’ report pertaining to the third review of the Extended Arrangement Under the Extended Fund Facility with Sri Lanka on 12 January 2018.

The IMF report said performance under the program has remained broadly on track since the second review despite a series of weather-related supply shocks. Revenue mobilization has helped meet the quantitative fiscal targets, while strong capital inflows have supported the buildup of international reserves. Parliamentary submission of the 2018 budget consistent with the program was set as a prior action for the third review and was completed on November 9. The budget targets a primary surplus of 1 percent of GDP and front loads fiscal consolidation towards the authorities’ objective of reducing the overall fiscal deficit to 3.5 percent of
GDP by 2020.

Nevertheless, Sri Lanka remains vulnerable to shocks given its high level of public debt, large financing needs, and weak external position. Therefore, it is important to build on the progress made and accelerate reforms to reduce fiscal and external vulnerabilities.

On December 6, 2017, the Executive Board of the International Monetary Fund (IMF) completed the third review of Sri Lanka’s economic performance under the program supported by a three year extended arrangement under the Extended Fund Facility (EFF) arrangement.

Completion of the review enabled the disbursement of the equivalent of SDR 177.774 million (about US$ 251.4 million), bringing total disbursements under the arrangement to the equivalent of SDR 537.456 million (about US$ 759.9 million). Sri Lanka’s three-year extended arrangement was approved on June 3, 2016, in the amount of about SDR 1.1 billion (US$1.45 billion, or 185 percent of quota in the IMF at that time of approval of the arrangement.

The government’s reform program, supported by the IMF, aims to reduce the fiscal deficit, rebuild foreign exchange reserves, and introduce a simpler, more equitable tax system to restore macroeconomic stability and promote inclusive growth.

Following the Executive Board’s discussion of the review, Mr. Mitsuhiro Furusawa, Acting Chair and Deputy Managing Director, said: “Sri Lanka’s performance under the Fund-supported program has remained broadly on track since the second review. Macroeconomic and financial conditions have been stable, despite a series of weather-related supply shocks.

The authorities remain committed to the economic reforms under the program and have undertaken measures to improve government revenue and accumulate international reserves. Going forward, it is important to build on the progress made and accelerate reforms to reduce fiscal and external vulnerabilities. “Fiscal performance has been satisfactory and all targets until September were met.

The new Inland Revenue Act will make the tax system more efficient and equitable, and generate resources for social and development programs. Nevertheless, Sri Lanka’s high debt burden, large gross financing needs, and weak financial performance of state-owned enterprises increases the importance of further fiscal consolidation. Timely progress in structural reforms, including tax administration and energy pricing, will support fiscal consolidation.

“Inflation and credit growth remain on the high side. Maintaining a tightening bias for monetary policy is recommended until clear signs emerge that inflation pressures and credit expansion have subsided. Macroprudential tools should also be used to help rein in credit growth and head off systemic risks. While financial soundness indicators remain stable, financial sector supervision and the AML/CFT regime should be further strengthened. “Along with efforts to deepen the foreign exchange market, it is important to further accumulate reserves and enhance exchange rate flexibility to reduce Sri Lanka’s external vulnerability.

“Structural reforms are also needed to enhance competitiveness and promote inclusive growth, including measures to improve trade and investment regimes.”

The IMF concluded that with the help of strong policy initiatives, complemented by the measures taken under the EFF, macroeconomic stability is being gradually restored in Sri Lanka, while achieving a satisfactory level of economic growth.

Supported by the ongoing policies and reforms, the Sri Lankan economy is expected to return to a high and inclusive growth trajectory, thereby helping to achieve broader objectives of employment generation and raising incomes of its citizens.

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