- Emphasises reforms needed to strengthen economic resilience to face vulnerabilities
- Target on primary surplus for end-June 2018 met, but reserve accumulation and tax revenues fell short of target
- Insists on strong policy mix, exchange rate flexibility
- Forecasts GDP growth to remain below 4% in 2018
- Lauds successful implementation of fuel pricing reform, encourages introduction of automatic pricing mechanism for electricity
- Calls on authorities to push ahead with reforms in Vision 2025
The International Monetary Fund (IMF) signalled it was satisfied with Sri Lanka’s economic stabilisation program, while urging an advanced revenue-based fiscal consolidation in the 2019 Budget to support greater progress with accelerated reforms to strengthen economic resilience.
The assessment follows a staff team from the IMF led by Manuela Goretti visited Colombo from 13 to 27 September to hold discussions on the fifth review of Sri Lanka’s economic program. “Reforms need to accelerate to strengthen the Sri Lankan economy’s resilience to domestic and external shocks, given still significant vulnerabilities. In the face of greater market volatility in emerging markets, the authorities have maintained a strong policy stance with prudent monetary policy and further fiscal consolidation,” IMF Mission Chief for Sri Lanka Manuela Goretti said in a statement yesterday.
Accordingly the mission made significant progress toward reaching a staff-level agreement with the Government on completing the fifth review of the EFF. Discussions will continue during the Annual Meetings of the IMF and World Bank in October. However, with revenues falling short of targets, the focus should remain on implementing the new Inland Revenue Act and other tax policy measures, supported by modernised business processes to strengthen tax compliance.
“The quantitative performance target on the primary surplus for end-June 2018 was met and inflation remained within the CBSL’s band, although reserve accumulation and tax revenues fell short of program targets due to the weaker economic environment and delays in policy implementation,” the statement said.
Further, the mission welcomed the authorities’ commitment to amend the Central Bank’s Monetary Law Act supporting the transition to inflation targeting and strengthening CBSL’s governance and accountability frameworks.
Renewed efforts by the Central Bankto strengthen reserve buffers and a clear commitment to exchange rate flexibility are critical to enhance external competitiveness and protect against adverse global market conditions.
“The CBSL’s efforts should be supported by a strong 2019 Budget, a well-defined medium termdebt strategy and a sound fiscal rule to secure debt on a downward sloping path and support investor confidence.”
The IMF projects the GDP growth to remain below 4% in 2018, and gradually reach 5% over the medium-term.
“Macroeconomic performance has been mixed in the first half of 2018, with growth recovering gradually and inflation stabilising in the mid-single digits. The current account deficit widened on the back of higher fuel imports, despite strong export performance, while international reserves declined from their peak level in April, amid volatile global market conditions,” the statement said.
It was pointed out that structural reforms need to accelerate to bring transparency, accountability, and cost efficiency to large State-Owned Enterprises. In this regard, the mission commended the successful implementation of the fuel pricing reform and encouraged the introduction of an automatic pricing mechanism for electricity.
The authorities should push ahead with their Vision 2025 to support Sri Lanka’s rapid and inclusive growth through sustained efforts to promote trade openness and investment, fight corruption, enhance social protection, and encourage female labour force participation.
The mission met with Prime Minister Ranil Wickremesinghe, Minister Finance Mangala Samaraweera, State Finance Minister Eran Wickramaratne, Central Bank Governor Dr.Indrajit Coomaraswamy, other public officials, and representatives of the business community, civil society, and international partners.