IMF keeps Sri Lanka’s growth unchanged at 3.5% despite attacks

• Says too early to map impact but calls on Govt. to maintain reforms 
• SL economy will normalise parallel to security situation 
• Does not see fresh risks for debt repayments, expects to see CB return to markets soon 
• Says tax relief for tourism industry should be well targeted and in line with fiscal goals 
• Wants reforms of SOEs to continue, including pricing formula for power this year 
  
   

The International Monetary Fund (IMF) yesterday said it was keeping Sri Lanka’s growth projection of 3.5% unchanged despite the Easter Sunday attacks, and did not see any fresh risks for debt repayments, but called on the Government to continue reforms to ensure growth picks up in the medium term. 

IMF Mission Chief for  Sri Lanka Manuela Goretti

IMF Mission Chief for Sri Lanka Manuela Goretti told reporters that the extension of the $1.5 billion Extended Fund Facility (EFF) to June 2020 would give the chance for authorities to achieve the targets laid out in the program. IMF officials also believe Sri Lanka’s economy will normalise parallel to the security situation.    

“We hope that the extension will provide support to authorities to anchor their policies and complete the economic reform agenda as they take steps to stabilise the security situation in the country. In the aftermath of the attacks financial pressure has been contained and we expect the economy will stabilise parallel to the security situation. Security and policy measures by the authorities will allow the tourism sector to build on performance of the past years given Sri Lanka’s strong potential as a tourist destination and avoid any lasting impact on the economy,” Goretti said. 

The Mission Chief said it was too early to see what impact the Easter Sunday attacks would have on the economy, especially the tourism industry, which is Sri Lanka’s third highest foreign exchange earner. Goretti called for well-targeted temporary tax relief for the tourism sector that is consistent with the broad fiscal objectives of the Government. 

“We think that it’s too early at this stage to assess what would be the macroeconomic impact of the recent shocks on the economy, specifically on the tourism sector. It is likely that tourism will be affected this year and in the near term, but we don’t have clear information to assess what could be the impact and the duration of the shock, so it would be speculative to revise our growth projection at this point. We decided to keep our baseline scenario unchanged, so growth projection for 2019 remains at 3.5%, with a gradual improvement expected in the medium term up to 5%. But we will continue to monitor developments and update once we have additional information.” 

The IMF projects growth to reach 5% in the medium term, supported by the Government’s reform efforts. It praised the Government for having shown resolve in bringing economic reforms under the program on track this year, after it was suspended during the constitutional crisis. The IMF pointed out sustained revenue mobilisation will be needed going forward to place public debt on a downward path, supported by stronger fiscal rules and the recently launched medium debt strategy. Reforms of State Owned Enterprises (SOEs) would also help mitigate fiscal risks, Goretti said.  

“Reforming of SOEs remain important, as they pose sizeable risks to the fiscal finances, and authorities last year implemented the very important fuel pricing formula, which helped reduce subsidies that disproportionately assisted the rich portion of the population. We have better targeting of social safety nets under Budget 2019. We expect authorities will continue on this reform effort, and will introduce a similar mechanism for electricity this year. Continuation of liberalisation measures and removal of para tariffs would also be beneficial.” 

The IMF also remained positive of Sri Lanka’s debt repayment capacity, as immediately after the attacks market pressure in the country has remained contained. Officials noted there has only been a small increase in international sovereign bonds of about 40 basis points, the domestic bond market has remained stable, and the rupee had a slight depreciation but has stabilised and appreciated slightly this week. 

“So we don’t see any major risk to the authorities financing plans at this stage. Two large bond repayments have already been successfully financed, and the next large international bond repayment is only due in October 2020. Sri Lanka remains open to international capital markets, and we are confident that as soon as the security situation improves, authorities will be back to tap markets. We don’t see any major risk at this point, given the profile of maturities and profiles of market conditions.” 

The IMF also praised the Central Bank for managing monetary policy prudently in the face of domestic and external shocks, and recommended it should continue pursuing a data dependent policy moving forward. The Central Bank should also continue to increase reserves as soon as market conditions normalise, the IMF said.  

“Under the IMF program, Sri Lanka is making important progress in reforming its economy, including by reforming its tax system, strengthening social safety nets and transitioning to inflation targeting. At this juncture, a joint effort by all stakeholders to sustain the reform momentum and maintain a prudent policy mix will assist to mitigate the impact of the recent attacks, but it is critical to strengthen the country’s reliance to shocks, support market confidence, and ensure strong and inclusive growth going forward,” Goretti said.  (UJ)