Central Bank says IMF program will ensure high and inclusive growth

The Central Bank on Saturday said the IMF program and its benefits will help facilitate high and inclusive growth in Sri Lanka, enabling the exploitation of Sri Lanka’s economic potential.

“The outcomes of the EFF supported economic program will result in improving macroeconomic stability, bolster market confidence, enhance competitiveness and outward orientation and strengthening external resilience in a challenging global environment. This, in turn, will help facilitate high and inclusive growth in Sri Lanka, enabling the exploitation of Sri Lanka’s economic potential,” the Central Bank said in its statement.

It also said the approval of the EFF by the Executive Board of the IMF signals its support for the government’s economic reform agenda over the medium term. 

According to the Central Bank the government plans to introduce fundamental and comprehensive reforms to tax policy and administration, which will ease the burden of public debt and the pressure on the BOP while providing fiscal space for the government’s key social and development spending programs.

Accordingly, a steady reduction of the overall budget deficit to 3.5 % of GDP is expected by 2020. The reform agenda also focuses on transforming State Owned Enterprises (SOEs) into commercially viable entities, underpinned by cost reflective pricing mechanisms and transparent governance. The gradual building up of foreign reserves and maintenance of inflation at mid-single digit level are also expected under the EFF supported economic program. 

Other key structural reforms include trade facilitation through the reduction of protection and the pursuit of new trade agreements. In the meantime, the Central Bank is expected to move towards introducing flexible inflation targeting as its monetary policy framework supplemented by the continuation of the flexible exchange rate policy.

The approval of the EFF is expected to attract additional funds from other multilateral and bilateral sources for the successful implementation of the reform agenda of the government.

The decision by the Sri Lankan authorities to seek an EFF from the IMF stemmed from both external and domestic developments. Externally, there has been renewed global economic uncertainty, particularly with the slowdown of the Chinese economy, fears of a Britain’s exit from the European Union, and adverse geopolitical developments in the Middle East. At the same time, the monetary policy normalisation in the United States prompted an outflow of funds from emerging market and developing economies, including Sri Lanka. Despite the low level of international commodity prices, the slowdown in the growth of demand in Sri Lanka’s traditional export markets and capital outflows exerted significant pressure on the external sector generating an overall deficit in the BOP. The government and the Central Bank adopted corrective measures to help dampen the pressure on the BOP and the domestic foreign exchange market. In particular, greater flexibility was allowed in the determination of the exchange rate, new macroprudential regulations were introduced as selective demand management instruments and monetary policy was tightened commencing end 2015. 

Nevertheless, the structural issues in the fiscal and external sectors persisted, and the government was of the view that an IMF support would further strengthen the government’s efforts to address structural issues.