On June 1, 2018, the Executive Board of the International Monetary Fund
(IMF) concluded the Article IV consultation
with Sri Lanka and completed the fourth review under the Extended
Arrangement under the Extended Fund Facility (EFF).
Completion of this review makes available SDR 177.774 million (about
US$ 252 million). The EFF arrangement in a total amount of SDR 1.1
billion (about US$1.5 billion, or 185 percent of quota) was approved on
June 3, 2016 (see
Press Release No. 16/262).
The Sri Lankan economy is expected to normalize gradually.
Following subdued growth in 2017 due to the lingering effects of
weather-related shocks, a recovery is underway as agriculture has
started to rebound and growth in exports remains robust. Real GDP
growth is expected to reach 4 percent in 2018 and around 5 percent
over the medium term. The Central Bank of Sri Lanka (CBSL) has
effectively curbed credit growth and stabilized inflation, despite
recent pressures. However, the economy remains vulnerable to
adverse domestic and external shocks, given the still sizable
public debt, large refinancing needs, and low external buffers.
Performance in the first half of the EFF program has remained broadly
on track. Despite some implementation delays and weather-related
shocks, the authorities achieved a primary surplus in 2017, through
expenditure management and revenue mobilization. The CBSL conducted
monetary policy prudently, bringing inflation back within its band.
Taking advantage of favorable market conditions, the CBSL also stepped
up its pace of reserve accumulation in 2017.
The authorities have achieved major milestones in their reform agenda.
These include the launch of the new Inland Revenue Act, important
progress with SOE and energy-pricing reforms, as well as adoption of
the CBSL’s Roadmap to flexible inflation targeting. Going forward, the
authorities should push ahead with their “Vision 2025” objectives, by
further advancing fiscal consolidation through stronger fiscal rules
and SOE governance; modernizing monetary and exchange rate frameworks;
accelerating their inclusive growth reform agenda through trade
liberalization, climate budgeting, and greater female labor force
participation, as well as better-targeted social protection programs.
Keeping the reform momentum is key to increase Sri Lanka’s resilience
to external shocks and lay the foundation for more sustainable and
Executive Board Assessment
Executive Directors commended the progress made by Sri Lanka under the
Fund-supported program. Directors welcomed the authorities’ efforts to
improve the policy mix through continued fiscal consolidation, prudent
monetary policy, and landmark structural reforms. However, they noted
that the economy remains vulnerable to adverse shocks given the still
sizable public debt, large refinancing needs, and low external buffers.
Against this background, Directors welcomed the authorities’ commitment
to the program and agreed that sustained reform momentum is critical to
safeguard the economic gains to date, strengthen resilience, and
support inclusive growth.
Directors welcomed the launch of the new Inland Revenue Act (IRA) to
support the authorities’ fiscal consolidation efforts. They emphasized
that progress with revenue mobilization can help safeguard important
social and infrastructure spending, including in response to natural
disasters. They also underscored the importance of enhancing public
investment efficiency. In this area, they emphasized the need for
systematic and transparent project appraisal and selection of
large-scale investment projects, ensuring consistency with fiscal
targets and mitigation of fiscal risks, given the country’s still high
public debt. Going forward, Directors supported the authorities’
commitment to anchor debt reduction plans through a robust fiscal rule
and medium-term debt management strategy.
Directors saw the recent approval of an automatic fuel pricing formula
as a major achievement towards reducing the still elevated fiscal risks
posed by state-owned enterprises (SOEs). They encouraged the
authorities to complete energy pricing reforms with an automatic
pricing formula for electricity, implement a restructuring plan for Sri
Lankan Airlines to put it on a solid commercial footing, and further
strengthen SOEs governance and transparency. Directors welcomed ongoing
efforts to strengthen social safety nets to help mitigate the
distributional impact on the most vulnerable.
Directors concurred that the Central Bank of Sri Lanka (CBSL) should
continue to manage monetary policy prudently, following a
data-dependent approach, in the face of inflationary pressures and
market volatility. Directors underscored the need for continued efforts
to build up international reserves and that exchange rate flexibility
should be the first line of defense against volatile global capital
flows. Directors welcomed the CBSL’s roadmap to flexible inflation
targeting and the planned amendments to the central bank law to further
strengthen the CBSL’s mandate, governance, and autonomy.
Directors welcomed efforts to further strengthen the resilience of the
financial sector, including with Basel III implementation. They noted
that macro-prudential tools could be used to rein in excessive credit
growth in the real estate sector and encouraged the authorities to
address identified weaknesses in non-bank financial institutions. They
commended ongoing efforts to improve the AML/CFT regime and looked
forward to timely implementation of FATF-compliant laws and
Directors underscored the importance of implementing growth-enhancing
structural reforms as outlined in the authorities’ medium-term
strategy. They recommended gradual liberalization of the trade regime
and further improvements to the investment climate, including through
robust implementation of the new IRA. To foster inclusive growth,
Directors encouraged additional measures to enhance the effectiveness
of social safety nets and female labor force participation through
labor market reforms and gender budgeting. They also noted that a
well-designed natural disaster risk financing framework can help Sri
Lanka address costs associated with climate change.