A team from the International Monetary Fund (IMF) led by Manuel Goretti has reached a staff level understanding on the fifth review and to extend the Extended Fund Facility (EFF) for another year with the remaining disbursements evenly spread to allow more time for economic reform.
Manuel Goretti who was in the country from February 14 to 28 met with various stakeholders and appraised Sri Lanka’s ongoing efforts to bring their economic reform programme back on track following the political turmoil of 2018.
“The team reached understandings at staff level on the 5th review and to extend the EFF for an additional year with the remaining disbursements spread evenly over this period to allow more time for the completion of the economic reform agenda.
Last year in October, IMF temporarily suspended their $1.5 billion Extended Fund Facility programme with Sri Lanka, which also included the release of the penultimate tranche. The three year programme is due to conclude in June.
Subject to the submission of 2019 budget being consistent with the EFF-supported programme, the Board is expected to consider Sri Lanka’s request for completion of the fifth review in May 2019. The authorities are taking steps to complete all the pending actions and structural benchmarks for this review over the next few weeks,” she had said in a statement.
Commenting on the economy, she said that it was gradually stabilising after the weak economic performance due to external shocks and domestic political uncertainty.
“Real GDP growth is expected to improve to about 3.5 percent this year, from 3 percent in 2018. Inflation recovered in January and is projected to reach 4.5 percent in 2019. The current account deficit widened to 3.2 percent of GDP in 2018, on the back of higher fuel prices, lower agricultural exports, and a surge in imports of vehicles, but is expected to narrow in 2019 benefiting from the correction in the exchange rate.”
The IMF’s EFF programme suffered a setback last year when primary fiscal surplus fell short of the targets by December due to weak revenues. The foreign exchange reserve target was also missed by a sizable margin, as market pressures from tight global financial conditions were exacerbated by the political crisis in late 2018.
“At this difficult juncture, a concerted effort is needed by all stakeholders to preserve the hard-won gains of the economic reform program, support macroeconomic stability, and strengthen the economy’s resilience to shocks, given the high level of public debt and low reserve buffers. The authorities’ unwavering commitment to revive the reform momentum is critical to restore market confidence and meet the large refinancing needs coming due,” she said.
Sustained fiscal consolidation through domestic revenue mobilization and prudent spending remains a priority to maintain public debt sustainability. Consistent implementation of the 2018 Inland Revenue Act (IRA) and modernization of the Inland Revenue and Customs departments are needed to achieve this goal, the team had said.
The team welcomed the authorities’ commitment to raise the primary surplus to 1.5 percent of GDP in the 2019 budget. Under the EFF-supported program, greater revenue mobilization is expected to make space for better-targeted social and capital spending, while a more business-friendly tax regime under the IRA can support investment and growth. The team welcomed the authorities’ commitment to put the high public debt on a downward path, bringing the fiscal deficit to 3.5 percent of GDP in 2020, in line with the reform program objectives, and 2 percent of GDP over the medium term, by adopting a sound fiscal rule and launching a new medium-term debt strategy.
“Renewed efforts to improve transparency, accountability, and cost-efficiency of large state-owned enterprises are needed to help safeguard fiscal sustainability and catch up with delays in reform implementation. The authorities should move forward with plans to bring SriLankan Airlines on a sound commercial and financial footing and complete energy pricing reforms to address rising fiscal risks.”
The team urged the authorities to finalize the amendments to the Monetary Law Act with a view to strengthen the CBSL’s mandate, decision-making structures, autonomy, accountability, and transparency in the roadmap towards inflation targeting.
The team met with Prime Minister Wickremesinghe, Finance Minister Mangala Samaraweera, State Finance Minister Eran Wickramaratne, Central Bank Governor Dr. Indrajith Coomaraswamy, other public officials, representatives of the business community, civil society and international partners.
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