IMF program back on track

• Program extension approved, $ 164 million disbursed 
• Recommends strengthening appraisal of large scale investments 
• Renew efforts to strengthen SOE governance, reduce losses    
• Calls on Central Bank to maintain data-based monetary policy  

The Executive Board of the International Monetary Fund (IMF) has approved the resumption of the $1.5 billion Extended Fund Facility (EFF) and the extension of the program by one year.

Releasing a statement the IMF said the program will run until 2 June 2020, with re-phasing of remaining disbursements. The approval also means Sri Lanka will receive the latest $ 164.1 million disbursement that was initially due last November.  

The IMF has agreed to grant waivers for the 2018 performance criteria on the primary balance and net official international reserves, which were disrupted due to the Constitutional crisis that saw the program being suspended. The latest tranche brings total disbursements under the arrangement to about $ 1.155 billion.

Sri Lanka's three-year extended arrangement was approved on June 3, 2016, in the amount of about $1.5 billion, or 185% of quota in the IMF at the time of approval of the arrangement.

Following the Executive Board's discussion of the review, IMF Deputy Managing Director Mitsuhiro Furusawa said, "The Sri Lankan authorities have successfully brought the program back on track, despite important setbacks, by advancing fiscal consolidation through a well-targeted 2019 budget, rebuilding reserves, while maintaining a prudent monetary policy under greater exchange rate flexibility, and reviving structural reforms. Sustaining policy discipline remains critical to strengthen resilience, given still sizable public debt and low external buffers, and support strong and inclusive growth.”

He pointed out sustained revenue mobilisation was needed to place public debt on a downward path, while making space for critical public investment and an expansion of the social safety net under well-defined selection criteria. Strengthening the selection and appraisal process of large-scale investment projects and assessing their fiscal affordability is critical, he added, given Sri Lanka's high public debt. Stronger fiscal rules and a medium-term debt management strategy will support medium-term fiscal consolidation and debt reduction efforts.

"The authorities should renew their efforts to strengthen State Owned Enterprise (SOE) governance and transparency, including by advancing a restructuring plan for SriLankan Airlines and completing energy pricing reforms, building on important progress with the implementation of the fuel pricing formula.”

The IMF also called on the Central Bank to pursue a prudent and data-dependent monetary policy. They pointed out amendments to the Central Bank law will be a major step in the transition to flexible inflation targeting. 

“Efforts to build reserves should be sustained, under greater exchange rate flexibility, to protect the economy against shocks. Harmonising regulation and supervision of financial institutions, strengthening the macro-prudential policy framework, and enhancing the crisis-preparedness toolkit will help further strengthen financial sector stability.”

"Continued implementation of structural reforms is essential to support strong and inclusive growth. Efforts should focus on liberalising trade, improving the business environment and promoting investment, strengthening governance, encouraging female and youth labour force participation, enhancing social protection, and improving crisis preparedness to natural disasters," the statement added.