Sri Lanka faces solvency issues

The International Monetary Fund (IMF) has published its Article IV Staff Report on Sri Lanka. The IMF report-2021 Article IV consultation with Sri Lanka has recommended that Sri Lanka should implement a credible and coherent strategy covering both the near and medium term to restore macroeconomic stability and debt sustainability.

The IMF says Sri Lankan economy is going through one of the most difficult episodes in its history, and our authorities are confident that Sri Lanka will rebound, as it has done in the past, as the pandemic effects subside, aided by policies that are being put in place to strengthen its resilience and uplift the lives of its people on a sustainable basis.

The report also proposed that a near-term monetary policy tightening is needed to ensure that the recent breach of the inflation target band is only temporary and that a market-determined and flexible exchange rate should be gradually restored. The IMF has recommended Sri Lanka a comprehensive set of policies with specific measures which included strengthening VAT and income taxes and energy pricing reforms whilst stating that Social safety nets should be strengthened, by increasing spending, widening coverage, and improving targeting, to mitigate the adverse impacts of macroeconomic adjustment on vulnerable groups.

It said Sri Lanka faces “solvency” issues because of risks stemming from unsustainable debt levels that jeopardise the nation’s economy. The full report provides further analysis of the nation’s debt and finances. “Rollover risk is very high,” the IMF said. “[Foreign] debt service needs of $7 billion each year will require access to very large amounts of external financing at concessional rates and long maturities, sustained over many years.”

The IMF recommends, to restore macroeconomic stability and debt sustainability, implementing a credible and coherent strategy covering both the near and medium term is needed. Staff recommends a comprehensive set of policies with specific measures. The report further said that renewed efforts are needed on growth-enhancing structural reforms, including increasing female
labor force participation, reducing youth unemployment, liberalizing trade, developing a wide- reaching and coherent investment promotion strategy, and reforming price controls and state- owned enterprises (SOEs). Efforts to strengthen governance and reduce corruption vulnerabilities should continue

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