Govt. should continue with prudent policies and reforms: IMF

• IMF approves sixth tranche of $ 1.5 b EFF 
• GDP growth revised to 2.7% and 3.5% in 2020 
• Despite fall in tourism current account expected to improve to 2.6% of GDP 
• Praises new Central Bank Act as landmark reform to increase independence 
• Says liberalisation, SOE reforms, and anti-corruption efforts important to bolster competitiveness 

The International Monetary Fund (IMF) yesterday said it has approved the sixth tranche of the $ 1.5 billion Extended Fund Facility (EFF), but called for continuation of prudent policies and institutional reforms as Sri Lanka moves closer to elections.   

A staff team from the IMF, led by Manuela Goretti, visited Colombo during 10-25 September to conduct the sixth review.

“The team reached understandings at the staff level with the Sri Lankan authorities on the sixth review of the EFF-supported program. The authorities are taking steps to complete all the pending actions and structural benchmarks for this review over the next few weeks,” the statement issued by the IMF said. 

The team welcomed the authorities’ efforts to normalise the security situation in the country, after the tragic terrorist attacks in April, and mitigate the impact of the shock on the economy. 

Real GDP growth was revised to 2.7% in 2019 and is projected to improve to 3.5% in 2020, as tourist arrivals and related activities gradually recover. Inflation is expected to remain stable at around 4.5% during 2019-20. Despite the recent fall in tourist arrivals and remittances, the current account balance is projected to improve to 2.6% of GDP in 2019 on the back of lower imports and stronger exports supported by the exchange rate correction in late 2018.

“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.

“The protracted impact of the 2018 political crisis and the Easter attacks are significantly impacting fiscal performance. The end-June fiscal target was missed by a large margin, due to frontloading of spending from the clearing of arrears and externally-financed capital projects carried over from 2018 as well as a sharp fall in indirect revenues following the terrorist attacks. While the program targets agreed at the time of the fifth review are no longer within reach, the authorities are committed to achieve a primary fiscal surplus of 0.2% of GDP in 2019, through implementation of remaining revenue measures in the 2019 budget and prudent expenditure management.”

The mission welcomed the authorities’ commitment to advance revenue-based fiscal consolidation in 2020 and over the medium term to preserve the gains achieved under the program, put the high public debt on a downward path, and provide space for better-targeted social and capital spending. Sustained efforts are needed to mobilise revenues, by broadening the tax base and enforcing compliance, and strengthen spending efficiency. To anchor public debt sustainability, the mission welcomed the authorities’ plans to revamp fiscal rules and establish an independent public debt management agency over the medium term, in line with international best practice. Improving the financial performance of SriLankan Airlines and advancing energy sector reforms, including by tackling cost inefficiencies and subsidies in the electricity sector, remain critical steps to reduce fiscal risks.

The mission supported the Central Bank of Sri Lanka (CBSL)’s prudent and data-dependent monetary policy approach and their renewed commitment to strengthen reserve buffers in line with program understandings. The CBSL should continue to allow for exchange rate flexibility and limit FX intervention to smooth excess volatility, in the event pressures from tighter global financial conditions were to intensify. The new Central Bank Act will be a landmark reform in the roadmap towards flexible inflation targeting by strengthening the CBSL’s mandate, governance, accountability, and transparency, in line with international best practice.

“The CBSL adopted temporary measures to support the tourism sector and ease credit conditions in the aftermath of the terrorist attacks, including a debt service moratorium and caps on bank interest rates. These exceptional measures should be lifted as soon as credit conditions stabilise to avoid distortions to the financial system, amid weaker credit quality and falling profitability,” the statement said.  

The mission welcomed the ongoing efforts to strengthen the regulatory and supervisory regime for banks and non-bank financial institutions. The CBSL’s plans to enhance the macroprudential policy framework and stress testing capabilities and to upgrade the contingency framework would also contribute to financial stability. The authorities have made progress in strengthening the Anti-Money Laundering and Countering the Financing of Terrorism regime.

“The mission welcomed the authorities’ ongoing plans to bolster competitiveness and medium term growth by gradually liberalising the trade and investment regimes, while addressing any potential revenue impact. These plans would need to be supported by an unwavering commitment to strengthen governance and transparency, notably in State-Owned Enterprises, and tackle corruption as well as stepped-up efforts to promote women’s economic empowerment and targeting social transfers to those who need it the most.”