IMF satisfied, approves $ 251.4 m new tranche for SL

• Latest disbursement brings total IMF support to $ 760m
• Says Govt. met fiscal targets and legislated income tax reform but further consolidation is necessary given Sri Lanka’s high debt burden and large gross financing needs
• Stresses further buildup of international reserves under greater exchange rate flexibility will help reduce Sri Lanka’s external vulnerability

the International Monetary Fund's (IMF) Executive Board last night announced the completion of the third review of Sri Lanka’s Extended Fund Facility (EFF) arrangement, which enables the disbursement of about $ 251.4 million.

In a statement, the IMF said on December 6, 2017, its Executive Board completed the third review of Sri Lanka’s economic performance under the program supported by a three-year extended arrangement under the EFF arrangement. Completion of the review enables the disbursement of the equivalent of SDR 177.774 million (about $ 251.4 million), bringing total disbursements under the arrangement to the equivalent of SDR 537.456 million (about $ 759.9 million).

Sri Lanka’s three-year extended arrangement was approved on June 3, 2016, in the amount of about SDR 1.1 billion (US$1.45 billion, or 185 percent of quota in the IMF at that time of approval of the arrangement. The Government’s reform program, supported by the IMF, aims to reduce the fiscal deficit, rebuild foreign exchange reserves, and introduce a simpler, more equitable tax system to restore macroeconomic stability and promote inclusive growth.

Following the Executive Board’s discussion of the review, Mitsuhiro Furusawa, Acting Chair and Deputy Managing Director, said:  “Sri Lanka’s performance under the Fund-supported program has remained broadly on track since the second review. Macroeconomic and financial conditions have been stable, despite a series of weather-related supply shocks."

The authorities remain committed to the economic reforms under the program and have undertaken measures to improve government revenue and accumulate international reserves. Going forward, it is important to build on the progress made and accelerate reforms to further reduce fiscal and external vulnerabilities.

“Fiscal performance has been satisfactory and all targets until September were met. The new Inland Revenue Act will make the tax system more efficient and equitable, and generate resources for social and development programs. Nevertheless, Sri Lanka’s high debt burden, large gross financing needs, and weak financial performance of state-owned enterprises increases the importance of further fiscal consolidation. Timely progress in structural reforms, including tax administration and energy pricing, will support fiscal consolidation.

“Inflation and credit growth remain on the high side. Maintaining a tightening bias for monetary policy is recommended until clear signs emerge that inflation pressures and credit expansion have subsided. Macroprudential tools should also be used to help rein in credit growth and head off systemic risks. While financial soundness indicators remain stable, financial sector supervision and the AML/CFT regime should be further strengthened.

 “Along with efforts to deepen the foreign exchange market, it is important to further accumulate reserves and enhance exchange rate flexibility to reduce Sri Lanka’s external vulnerability.

 “Structural reforms are also needed to enhance competitiveness and promote inclusive growth, including measures to improve trade and investment regimes.”