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The International Monetary Fund (IMF) has commended the Government for strengthening the economy with reforms but emphasised further progress was warranted given the new external and internal challenges.
The assessment follows the IMF staff team, led by Jaewoo Lee, concluding a two-week visit to Sri Lanka to discuss the second review of the Sri Lankan authorities’ economic program which is being supported by a three-year Extended Fund Facility (EFF).
The program aims to support the authorities’ ambitious reform agenda to put public finances on a sustainable footing and create space for its social and development program.
The mission made significant progress toward reaching a staff level agreement with the Government on the completion of the second review. Discussions will continue in April in Washington D.C. during the Spring Meetings of the IMF and World Bank.
Overall, macroeconomic performance in the second half of 2016 was mixed with gradually recovering growth and an uptick in inflation due to the impact of drought and the VAT increase. The current account remained stable, but the financial account weakened with the resumption of capital outflows. A more prolonged drought could raise food and oil imports with adverse impact on growth, inflation and the balance of payment.
“The mission commends the authorities for strong efforts in implementing their IMF-supported economic reform program with all fiscal quantitative targets through end-December being met,” the statement by Lee said.
“Substantial progress has been made in stepping up revenue collections and automating revenue administration, which has been the basis for meeting fiscal targets. However, net international reserves fell short of the target and progress on implementing structural benchmarks was somewhat uneven with some of the reforms lagging behind intended timelines.
Accordingly, the mission and the authorities have discussed decisive actions to maintain the reform momentum in light of an uncertain external environment,” the statement added.
To this end, it is important for the Government to continue on revenue-based fiscal consolidation and generate adequate resources to support its social and development objectives while maintaining debt sustainability. Notably, advancing the legislative process for the new Inland Revenue Act, with effective public consultations, is a critical step towards rebalancing the tax system toward a more predictable, efficient and equitable structure.
The mission encourages the Central Bank of Sri Lanka to remain vigilant in monitoring inflation pressures and stands ready to tighten monetary policy if inflation or credit growth does not abate. In light of mounting external pressures, the mission encourages the Central Bank to take stronger actions towards rebuilding international reserves and maintaining exchange rate flexibility. In this regard, the mission and the authorities discussed IMF technical assistance to facilitate transition to a flexible inflation targeting framework.
The mission also encourages the Government to accelerate implementation of structural reforms in public financial management and state-owned enterprises (SOEs), building on the substantial technical assistance received so far. In this regard, finalising and publishing Statements of Corporate Intents for large SOEs is the first necessary step for enhancing transparency and accountability in the reform process. The mission also supports the ongoing work to design reforms in the business environment and competitiveness which are supported by a number of development partners.
The mission met with Prime Minister Ranil Wickremesinghe, Finance Minister Ravi Karunanayake, Governor of the Central Bank Dr. Indrajit Coomaraswamy, parliamentarians, other public officials and representatives of the business community, civil society and international partners.
S&P Global Ratings said yesterday it has affirmed its ‘B+’ long-term and ‘B’ short-term sovereign credit ratings on the Democratic Socialist Republic of Sri Lanka.
The outlook on the long-term rating remains negative. We also left our transfer and convertibility risk assessment on Sri Lanka unchanged at ‘B
It said the Sri Lankan government’s reform efforts and the IMF lending program have led to nascent improvements in the country’s fiscal profile. “We are therefore affirming our ‘B+/B’ sovereign credit ratings on Sri Lanka,” S&P added.
“The outlook remains negative, however, given Sri Lanka’s weak external profile, in particular, its low net reserve levels, and the vulnerability of public finances to any exchange rate shocks,” it said.
