Reforms essential for sustainable growth

International Monetary Fund (IMF) Mission Chief for Sri Lanka Manuela Goretti talks to Daily FT on the progress of the $1.5 billion Extended Fund Facility (EFF), extending theeprogram by one year, and the importance of maintaining fiscal consolidation and reform measures to boost market confidence for growth. The IMF’s Executive Board is expected to considertthe Government’s request for an extension in early May Given below are excerpts of the interview

 

By Uditha Jayasinghe 

 

Q: How have the talks progressed? 

 We had very productive discussions with the authorities. We reached understandings at the staff level on the fifth review under the Extended Fund Facility (EFF) arrangement and the extension of the arrangement for one additional year. The IMF’s Executive Board is expected to consider the authorities’ request in early May 2019. In the meantime, the authorities are taking steps to complete all the pending actions and structural benchmarks for this review. 

Q:  What are the key points that are being looked at to put the EFF program back on track?

.There are three key elements to put the program back on track: implementing revenue-based fiscal consolidation and SOE reforms to put public debt on downward path; resuming efforts to rebuild foreign exchange buffers; and accelerating structural reforms. These elements are essential to address macroeconomic imbalances, strengthen the resilience of the economy to shocks, and lay the foundations for strong, sustainable, and inclusive growth.  

Q:  How was theeprogram extension considered by the IMF?

 The current EFF arrangement was approved by the IMF’s Executive Board in June 2016 for a period of three years. During the recent visit to Colombo, we reached understandings at the staff level to extend the arrangement for one additional year, i.e., to four years, which is the maximum total duration that EFF arrangements can have. The IMF’s Executive Board is expected to consider the authorities’ request in early May.

Q:  Would there be a funding enhancement as well? 

 The total amount of financing envisaged under the program, of about$$1.5 billion, remains the same. Remaining disbursements under the arrangement will be evenly spread over the extended period. No additional financing is deemed necessary. The extension is intended to allow more time for the completion of the economic reform agenda envisaged under the arrangement. 

Q:  What are the structural goals that would be set up under a new staff-level agreement? 

 The economic reform program aims at improving the institutional policy framework, safeguarding fiscal sustainability, strengthening financial sector stability, and promoting inclusive growth. To this end, the authorities have committed to finalzsing the amendments to the Monetary Law Act, which will facilitate the transition to inflation targeting by strengthening thekCentral Bank’s mandate, decision-making structures, autonomy, accountability, and transparency. They are also developing a medium-term debt strateg;, and will work at modernzsing the Inland Revenue and Customs departments and upgrading the fiscal responsibility framework. Steps are also envisaged to improve the transparency, accountability and cost-efficiency ofsState-owned enterprises, including by moving forward with plans to bring SriLankan Airlines onto a sound commercial and financial footing and complete energy pricing reforms. In the financial sector, the authorities are implementing the recommendations from the recent Financial Sector Stability Review and further strengthening the Anti-Money Laundering and Countering the Financing of Terrorism framework. There is also ongoing work to improve social safety nets, targeting them towards the most in need, advance governance and anti-corruption efforts, and facilitate female participation in the workforce.

Q:  In an environment of persistent low growth, is there room for some loosening of policy? 

.With public debt at over 9t% of GDP, large refinancing needs, and low reserve buffers, a prudent policy mix is necessary. Sustaining the fiscal consolidation effort and reform momentum is key to maintaining market confidence. The 2019tBudget recently announced by the Sri Lankan authorities strikes an adequate balance by advancing fiscal consolidation while also accommodating critical public spending and growth-friendly tax measures to mitigate the impact of the adjustment on the most vulnerable, and support investment and growth. 

With public debt at over 90% of GDP, large refinancing needs, and low reserve buffers, a prudent policy mix is necessary. Sustaining the fiscal consolidation effort and reform momentum is key to maintaining market confidence. The 2019 Budget recently announced by the Sri Lankan authorities strikes an adequate balance by advancing fiscal consolidation while also accommodating critical public spending and growth-friendly tax measures to mitigate the impact of the adjustment on the most vulnerable, and support investment and growth 

Q:  What would the IMF’s prescription be for boosting growth? 

 Macroeconomic stability, greater resilience to shocks, and structural reforms, including through trade liberalzsation, can help spur investment and unlock Sri Lanka’s growth potential. The 2018 Article IV consultation, published in June of last year, has specific recommendations to promote stronger and inclusive growth. These include rationalzsing para-tariffs to reduce excessive protection that has hindered trade diversification and foreign direct investments, taking advantage of rule-oriented and investment-based incentives in the Inland Revenue Act, improving the financing strategy to cope with natural disasters, and taking steps to facilitate female participation in the labour force. All these efforts should be accompanied by a strengthening of social safety nets to expand and improve the targeting of social assistance programs with a view to lessen the burden of macroeconomic adjustment on the most vulnerable segments of the population.

Q:  How concerned are you of fiscal slippage, given that 2019 is an election year? 

 Continued fiscal discipline in 2019 is critical to safeguard fiscal sustainability and meet Sri Lanka’s large refinancing needs. The implementation of the Inland Revenue Act and other tax reforms will increase tax collections, while providing generous investment incentives for businesses. This will help reduce the fiscal deficit and place the debt to GDP ratio on a downward path, while preserving space for well-targeted social spending and critical public investment projects.

Q: tThe Government has set a deficit target of 3.5%, which it is unlikely to meet, and has requested a moderate primary account target. How do you view this?

The authorities’ fiscal consolidation efforts, as presented in the recenttBudget speech, are evenly spread between 2019 and 2020, compared with the more frontloaded adjustment envisaged in the last review. This is consistent with achieving an overall fiscal deficit target of 3.t% of GDP by 2020. Consolidation should be mainly revenue based, through continued implementation of the Inland Revenue Act and new revenue measures as needed.

Q: SOE reform has remained persistently slow. How concerned is the IMF about this? 

The authorities have made progress on SOE reforms, although more remains to be done to bring SOEs onto a sound financial footing and containtthe Government’s potential liabilities. The five largest SOEs have signed and published Statements of Corporate Intent (SCIs) outlining their objectives, capital expenditure and financing plans, as well as Key Performance Indicators (KPIs). This encourages efficiency of SOEs through greater accountability and transparency. More SOEs should have SCIs and their performance should be monitored regularly against KPIs. Audited financial statements should also be published more promptly. The implementation of the monthly fuel pricing formula was an important step towards achieving cost recovery levels and mitigating fiscal risks from CPC. Further efforts are needed to complete energy reforms. The authorities’ plans to bring SriLankan Airlines back onto a sound financial footing are also welcome. 

Q:  How can Sri Lanka improve its reserve situation?

 Foreign reserves serve as an important buffer against external shocks. It is important that thekCentral Bank continues building reserves by purchasing foreign exchange as market conditions permit, limiting interventions to episodes of disorderly market conditions and allowing exchange rate flexibility in response to shocks. 

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