IMF outlines way forward

Monday, 15 January 2018 00:00 -     - {{hitsCtrl.values.hits}}

  • Primary surplus of 1% of GDP would anchor investor confidence
  • Advocates tightening monetary policy, macro-prudential measures on real estate loans
  • Welcomes Financial System Stability review by Govt., wants stronger financial sector supervision
  • EFF funded for next 12 months but risks remain  
  • English manual explaining IRA to be out in Jan.
  • SOE reform urgent, CEB, CPC and SriLankan rake up Rs. 52 b in losses or 0.4% of GDP
  • Future reviews to set key milestones on SriLankan as a structural benchmark

By Uditha Jayasinghe

Strengthening revenue and public debt management will be the dual challenges before Sri Lanka in 2018, the International Monetary Fund (IMF) has said in its latest evaluation with the implementation of the new Inland Revenue Act in April having a key role in economic stabilisation.   

A “front-loaded consolidation” that targets 1% of GDP primary surplus in 2018 will help anchor investor confidence, the IMF said in its Third Review under the Extended Fund Facility (EFF). Effective implementation of the new Inland Revenue Act (IRA) and the tax package of the 2018 Budget will also protect social and infrastructure spending. Stronger disaster provisions in the 2018 Budget should mitigate weather-related adversities. Enhancing debt and financial management frameworks will support durable fiscal consolidation.  

“We all want to celebrate the progress over the last year and a half but it remains important that the process continues and provides a foundation for the reforms, which will increase the growth potential of the economy,” said IMF Mission Chief for Sri Lanka Jaewoo Lee.

The IMF program is fully financed for the next 12 months but revenue slippage in the form of lower than expected capital inflows, reserves shortfall, lower growth and new pressures in the trade account remain risks.  

Reserves “reasonable” by the standards of the Central Bank and the IMF are expected to be about $ 8 billion by 2018 end with the IMF upbeat of the Central Bank over-performing in its reserve targets.

The report says the weak financial performance of major SOEs in 2017 highlights the need for timely reforms. Three SOEs closely monitored under the program - Ceylon Electricity Board (CEB), Ceylon Petroleum Corporation (CPC) and SriLankan Airlines - recorded a combined loss of Rs. 52 billion (0.4% of GDP) in the first half of 2017 as opposed to a combined profit of 0.2% of GDP in 2016.

The IMF continued to be wary of credit growth, which slowed to about 15% at the end of November, sustaining its call for macro-prudential measures for construction loans and mortgages. They also welcomed the Financial System Stability Review, which the Government has expressed intent to implement.  

“Strengthening Sri Lanka’s ability to manage debt is a key part of the program. Fiscal consolidation-centred proper evaluation is the key and to make it possible we speak of revenue mobilisation, strengthening tax administration and also control over Government spending. 2018 and 2019 are quite challenging years because of big payments due and this is the context in which the Government is looking at risk management, to allow greater capacity, to manage SOEs more efficiently among other elements. We are supportive of the effort and will collaborate with the Government to achieve these goals,” he added.

The IMF projects real GDP growth to 4.6% in 2018. Inflation is projected to revert to around 5% and the current account deficit is expected to shrink to about 2.5%. But the IMF was insistent that the Central Bank should stay the course of tight monetary policy and be hawkish with macro-prudential measures.

In terms of IRA implementation, the Government has been conducting awareness programs on the new Inland Revenue Act both in Colombo and elsewhere. The English version of the IRA manual has been prepared and this is the first time that IRA will have an accompanying manual that will explain how various provisions are applied and this manual is expected to be published sometime in January. It will be available on the website of the Inland Revenue Department.

“In the department itself there is a lot of preparatory work going on in terms of documented systems, defining regulations in support of the Act on 1 April,” IMF Resident Representative Dr. Eteri Kvintradze told reporters.

“It’s a process. I think a lot of work went into understanding provisions and officials of the IRD are very well versed now in terms of what is the legal framework. They have been conducting effective consultations including in regions and people have given them positive feedback. Obviously the legal framework is not sufficient and there has to be more processes, automation and training of people that has to support the Act. That process is going on. We are providing technical assistance. With this kind of legislation there will obviously be some settling in but consultations will enable people to work with the law,” she added.