Financial News from Sri Lanka: During September 10-25, 2019, an International Monetary Fund (IMF) staff team led by Manuela Goretti toured Colombo to perform the sixth evaluation under the economic reform program of Sri Lanka backed by a four-year EFF agreement.
At the end of the visit, Ms. Goretti made the following statement: “On the sixth evaluation of the EFF-supported program, the team achieved personnel level understandings with the Sri Lankan officials. Over the next few weeks, the authorities will take measures to finish all the pending activities and structural benchmarks for this evaluation.
“The team welcomed the attempts of the authorities to normalize the country’s safety condition following the tragic April terrorist attacks and mitigate the economic effect of the shock. Real GDP growth in 2019 has been updated to 2.7 percent and is expected to enhance to 3.5 percent in 2020 as tourist arrivals and associated activities recover gradually. Inflation is anticipated to stay stable in 2019-20 at around 4.5%.
Despite the latest decline in tourist arrivals and remittances, the present account balance is expected to enhance to 2.6% of GDP in 2019 on the back of reduced tariffs and greater exports backed by the exchange rate correction at the end of 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 percent 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 mobilize 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 stabilize to avoid distortions to the financial system, amid weaker credit quality and falling profitability. 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 liberalizing 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.”
The team met with Prime Minister Wickremesinghe, Minister of Finance Samaraweera, State Minister of Finance Wickramaratne, Governor of the Central Bank of Sri Lanka Coomaraswamy, Secretary to the Treasury Samaratunga, Senior Deputy Governor Weerasinghe, other public officials, representatives of the Parliamentary Opposition, business community, civil society, and international partners.
The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the findings so far, staff will prepare a report that, subject to management approval, will be presented to the IMF’s Executive Board for discussion and decision.
- We welcome the authorities’ commitment to fiscal discipline and institutional reforms to anchor debt sustainability, while providing space to support the ongoing recovery and social goals.
- The new Central Bank Act will be a landmark reform in the roadmap towards flexible inflation targeting, strengthening the Central Bank of Sri Lanka’s mandate, governance, accountability, and transparency, in line with international best practice.
- Trade and investment liberalization, SOE reforms, and stepped-up anti-corruption efforts will be important to bolster Sri Lanka’s competitiveness and medium-term growth.