Press Release No. 10/317

Press Release No. 10/317
August 23, 2010

An International Monetary Fund (IMF) mission led by Mr. Brian Aitken of the Asia and Pacific Department visited Colombo August 11-23, 2010, to conduct discussions for the fourth review of the Stand-By Arrangement, approved on July 24, 2009. The mission also held discussions as part of the Article IV consultation, a regular surveillance exercise that the IMF undertakes with all its member countries. The mission met with officials from the Central Bank, the Ministry of Finance and Planning, the Presidential Tax Commission, and other government ministries and departments, as well as representatives of civil society and the private sector.

The mission issued the following statement today at the conclusion of its visit:

“Overall economic conditions are improving as expected in the last visit, and the economy is likely to show strong growth this year. External balances are strong, remittance inflows continue at a high rate, tourism prospects continue to improve rapidly, and gross reserves remain at comfortable levels. We assess the central bank’s recent rate cut as appropriate—with bank lending only slowly beginning to rebound, and economic growth still below potential, we see little sign of emerging demand-driven inflationary pressures, and average inflation for the year as a whole is expected to remain in the single digits.

“Performance under the program has been good. End-June performance criteria on domestic budget borrowing, reserve money, and net reserves have been met. With budget revenues increasing and expenditure restraint continuing, fiscal performance so far remains consistent with achieving the government’s full-year deficit target of 8 percent of GDP. Financial sector reforms continue to go forward in line with the program.

“With the program now back on track, this review is an opportune time to assess Sri Lanka’s medium-term challenges in the context of the Article IV consultation. Since the last consultation two years ago a great deal has changed—the end of the 30-year war has led to a surge in investor enthusiasm, bolstered by the decline in the risk of a short-term balance of payments crisis—and future growth prospects have improved markedly. Significant near- and medium-term macroeconomic challenges will need to be addressed, however, if Sri Lanka is to take full advantage of the current favorable environment.

“First, a fundamental tax reform is needed—and planned—to simplify the existing system, broaden the tax base (including by restricting concessions), spread the tax burden more equitably, and support economic growth, all while boosting the revenue-to-GDP ratio. The resulting fiscal space could allow increased public capital spending on reconstruction and infrastructure as well as social spending to support the vulnerable, but it is clear that the country’s large investment needs cannot be met through the government budget alone. Private-sector investment will need to play a critical role. To foster this investment, policies will need to be geared toward preserving macroeconomic stability, ensuring external competitiveness, facilitating capital market development, and improving the investment climate, all of which would lay the basis for higher sustainable growth in a post-war environment.

“The authorities’ progress thus far on key policy reforms under the program, albeit with some delays, is an important step toward meeting Sri Lanka’s medium-term challenges. The IMF team will now return to Washington to consult with IMF management and will discuss steps toward planning an Executive Board meeting on the Article IV consultation and the fourth review under the Stand-By Arrangement.”