Press Release: Statement at the Conclusion of the IMF Staff Mission to Sri Lanka

September 25, 2013

Press Release No. 13/359
September 25, 2013

A staff mission led by Mr. Todd Schneider visited Colombo during September 17-25 to conduct Post-Program Monitoring discussions. This form of enhanced surveillance is routine practice for countries which have had “exceptional access” to IMF resources, as is the case for Sri Lanka, which last year successfully completed a US$2.6 billion IMF program. The mission met with government and central bank officials, as well as civil society and private sector representatives. Mr. Schneider issued the following statement today:

“GDP growth accelerated to 6.8 percent in the second quarter of 2013. However, given moderate credit growth, flat budget revenues, and relatively low growth in non-oil imports, it is not yet clear whether the acceleration in economic growth will continue into the second half of the year. The mission now forecasts growth of 6.5 percent in 2013. The current account deficit narrowed in the first half of 2013, and the balance of payments surplus should widen this year. Non-performing loans have risen somewhat, but the financial system remains relatively strong.

“Given the possible tapering of exceptional monetary stimulus by the U.S. Federal Reserve in the months ahead, emerging and frontier markets are likely to face a period of slowdown or even reversal of capital inflows. While the rupee has been relatively resilient so far, the balance of external risks for Sri Lanka has shifted to the downside.

“In this more complex global environment, it will be essential to adhere to the flexible exchange rate regime that has been a core component of the policy framework since early 2012. Intervention should be limited to dealing with excessive short-term volatility. Contingency plans—including a mix of fiscal and monetary policies to counter potential market pressures—should be prepared in anticipation of possible shifts in market conditions. New external borrowing should also be done with a close eye to sustainability, and the need to ensure that investments generate the resources needed to service these obligations.

“In light of the risks facing Sri Lanka, the mission recommends that policy rates remain on hold which will also give time to assess the impact of recent easing. On the fiscal side, weak revenues remain a serious challenge and the priority should be to reverse the downward trend through reducing exemptions, broadening the tax base (particularly for direct taxes), and strengthening tax administration and compliance. Efforts to boost growth should focus on structural measures, such as tariff reform, enhanced revenue mobilization to support capital expenditure, and improvements in the general business climate.”

A discussion on Post Program Monitoring by the IMF’s Executive Board is expected to take place in late November.


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