Sri Lanka’s economic outlook remains uncertain and will depend, to a large extent, on the course set for economic policies in the coming months, the International Monetary Fund (IMF) has said.
Releasing a statement Wednesday following the conclusion of the Fourth Post-Program Monitoring (PPM) with Sri Lanka on November 13, the Executive Board of the IMF said the recent economic developments reflect a more challenging external environment as well as a sharpening of macro-financial imbalances that began to emerge late in 2014.
On the plus side, economic growth continued to be fairly strong in 2015, while headline inflation has remained low. The external current account deficit is projected to narrow moderately in 2015 due largely to lower oil prices, and private sector credit growth has picked up sharply in 2015.
However, deterioration in the overall balance of payments, the loss of Central Bank foreign exchange reserves, the weak state of public finances, and growing public debt are reasons for concern, the IMF assessed.
“Despite continued access to international debt markets, these trends suggest that financial risks for Sri Lanka have increased,” the Executive Board noted.
The global lender suggested that, to mitigate these risks, the authorities should take appropriate corrective actions to safeguard macroeconomic stability and lay the foundation for durable and inclusive growth.
“Improvements in the business climate, reform of state owned enterprises, and a more open trade regime are key to boosting competitiveness and growth.”
In view of high public debt, fiscal developments this year pose a risk to the economy and call for ambitious measures in the 2016 budget to put Sri Lanka’s fiscal position on a more sustainable footing, the Board said.
Pointing out that Sri Lanka has a very low tax-to-GDP ratio, the IMF Executive Board said the high levels of current expenditure constrain needed development spending, limit policy space, and threaten debt sustainability.
“Therefore, a comprehensive reform of tax policy and administration, and a prompt resumption of fiscal consolidation supported by increased revenues should be a key policy priority,” the Board recommended.
Although the financial sector remains relatively stable, and the authorities are taking measures to tackle remaining vulnerabilities in the nonbank financial sector, there is the need for continued progress in consolidated bank supervision and in developing a more robust stress testing framework, the IMF emphasised.