Wednesday Nov 06, 2024
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Wednesday Nov 06, 2024
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IMF Mission Chief Peter Breuer gestures during the media briefing held at the Central Bank yesterday
– Pic by Pradeep Pathirana
By Charumini de Silva
The International Monetary Fund (IMF) yesterday said Sri Lanka is showing ‘tentative signs of stabilisation’ but insisted concerted efforts are still required to steer the country towards a complete economic recovery.
This observation follows the conclusion of a visit by an IMF staff mission team led by Peter Breuer and Katsiaryna Svirydzenka to Colombo from 14 to 27 September to discuss economic and financial policies to support the approval of the first review of the program under the $ 2.9 billion Extended Fund Facility (EFF).
“Despite early signs of stabilisation, full economic recovery is not yet assured,” Breuer told journalists yesterday.
Noting that the people of Sri Lanka have shown remarkable resilience in the face of enormous challenges, he said the country made commendable progress in implementing difficult, but much-needed reforms.
“Growth momentum remains subdued, with real GDP in the second quarter contracting by 3.1% on a year-on-year (YoY) basis and high-frequency economic indicators continuing to provide mixed signals. Reserve accumulation has slowed in recent months. Sustaining the reform momentum is critical to put the economy on a path towards lasting recovery and stable and inclusive economic growth,” he added.
Breuer pointed out that the significant gap between Government expenditures and revenue collection remains a concern, adding that reforms in tax policies and administration are vital to bridge it.
Stating that the Government has met the program’s primary balance targets and remains committed to this important pillar of the program to support their efforts to restore debt sustainability, he said that revenue mobilisation gains are expected to fall short of initial projections by nearly 15% by year-end, in part due to economic factors.
“Tax collection is a concern. It is an important pillar of the program to sustain the essential expenditures of Government services like education, health, infrastructure and support for the poor and vulnerable with an appropriate amount of revenue. However, in Sri Lanka, there is a big gap between State revenue and expenditure. The expenditures are 19% of GDP and the revenue is 9% of GDP and that gap needs to be filled. To accomplish that objective, it is important to have the appropriate tax policies and tax administration systems in place that support this effort.
He explained the need to address missing tax revenues requires reforms to increase taxation, recognising the impact on the population’s financial burden.
“This extends beyond taxes, encompassing utility prices and inflation, which have significantly raised costs for citizens. The country is grappling with the consequences of past policies and shocks, particularly the massive tax cut in 2019 compounded by subsequent economic challenges. This culminated in a crisis last summer, necessitating the public to share in the financial responsibilities.
He emphasised that to increase revenues and signal better governance, it is important to strengthen tax administration, remove tax exemptions, and actively eliminate tax evasion.
“The objective for the Government in 2024 is to raise revenue, equivalent to 12% of GDP. So there is some way to go to get there. We are looking to the benefits of the tax reforms that were introduced last year to bear full fruit and to be supplemented with appropriate conditionals,” Breuer said.
He commended the Government’s steady progress in implementing structural reforms, including the enactment of crucial legislations like the Central Bank Act and the Anti-Corruption Act, noting that if implemented effectively, it could significantly enhance governance.
It was also noted that the upcoming IMF Governance Diagnostic report is expected to further guide future reform strategies aimed at strengthening governance.
In the context of the IMF’s assessment process for the second tranche, Breuer said there is ‘no fixed timeline’.
“Two crucial conditions must be met: firstly, an agreement on policies and reforms to progress in line with program objectives, especially in light of identified shortfalls this year. Efforts are underway to address and compensate for this shortfall. Secondly, addressing the debt situation and reaching agreements with creditors is essential for sustainability. Once both conditions are satisfied, an administrative process follows, including the preparation of a performance assessment report. This report undergoes various stages before being reviewed by the Executive Board, which ultimately makes the final decision and publishes the findings for public access,” he explained.
Regarding debt sustainability, he acknowledged ongoing efforts to regain control through domestic debt restructuring and discussions with external creditors.
On the debt situation, he said the key lies in a process called ‘financing assurances’, relevant to both official and commercial creditors. “In Sri Lanka’s case, the debt is spread around quite a bit, externally and domestically. What we look for is to be able to move forward in this debt restructuring case is adequate progress in the negotiations with the creditors. That would give us confidence that this process will be concluded promptly with program objectives and deadlines,” Breuer said.
“From the IMF perspective, what matters to us is that debt targets are achieved. Remember, these are the targets concerning the debt stock on the floor. The gross financing needs the debt service on the external side and also the debt relief that is needed within the program period. The Government has chosen a particular way and the banks are not in there. While we care about the target, we also care, to some extent, how we get it to maintain financial and social stability because otherwise the problem could just become worse and then these targets do not apply anymore,” he added.
He said the financial stability is maintained, but the banks will nevertheless suffer from the restructuring through the exposure to the Government through domestic foreign exchange instruments, as well as external foreign exchange instruments.
The IMF’s mission reaffirmed its commitment to providing support during these challenging times, highlighting the dynamic nature of programs that may require adjustments to meet their objectives.
