Statement at the Conclusion of the IMF Staff Mission to Sri Lanka

Press Release No. 14/270
May 30, 2014

An International Monetary Fund(IMF) staff mission led by Mr. Todd Schneider visited Colombo during May 20-30, 2014 to conduct discussions for the 2014 Article IV consultation—the IMF’s regular exchange of economic views with each of its member countries—and the second Post-Program Monitoring discussion with Sri Lanka. The mission met with the government and central bank officials, as well as civil society and private sector representatives. The completion of the Article IV Consultation is subject to the discussion by the IMF Executive Board.

At the conclusion of the visit, Mr. Schneider issued the following statement:

“Sri Lanka’s macroeconomic performance in 2013 largely exceeded expectations. Real GDP growth reached 7.3 percent, inflation declined to below 5 percent. The external current account strengthened, supported by a robust recovery in goods exports, as well as solid growth in services and inward remittances. The near-term outlook appears positive, aided by a recovery in advanced economies. The mission projects real growth to continue at around 7 percent and inflation to remain close to current rates in 2014. Strong export growth is likely to continue, and may facilitate a further reduction of the external current account deficit--leaving room for additional accumulation of international reserves by the central bank.

“Steady progress on fiscal consolidation and reduction of public debt is a linchpin of macroeconomic stability in Sri Lanka, and a critical factor in maintaining policy credibility and confidence. Containing the deficit to 5.9 percent of GDP in 2013 was welcome, as is the commitment to further reduce the deficit to 5.2 percent of GDP in 2014. In addition to continued tight spending control, structural reforms supporting these objectives include putting large state owned energy corporations on a more commercial footing, extension of Value-Added Tax coverage and reducing the threshold, and automation of tax collection and public financial management systems. However, low tax revenue mobilization remains a concern—particularly given a relatively high debt level and the ongoing shift from concessional to more expensive loans on commercial terms. Sufficient fiscal room is also needed to meet long-term social and infrastructure development needs while still reducing the public debt-to-GDP ratio. In this context, staff highlighted the need to put revenues firmly on an upward path, and recommended a focus on broadening the tax base through streamlining exemptions and tax holidays.

“The current supportive monetary policy stance appears appropriate given low inflation and moderate private sector credit growth. Changes in policy rates have also brought about a welcome reduction of lending rates. However, given strong growth and the long lags involved in the operation of monetary policy, a continued forward looking approach to monetary policy is needed together with close monitoring of possible price pressures.

“Ongoing financial sector consolidation offers a potential opportunity to increase the resilience of the system and contribute to more effective oversight. The mission highlighted that restructuring of operations would be key to achieving efficiency gains, and that it would be important to ensure that mergers are accompanied by continued progress on corporate governance. Identifying and mitigating risk factors which may limit potential efficiency gains both during and after the implementation process will be key to creating a financial system that is efficient, profitable, and best serves the needs of a growing economy.

“Sri Lanka has been resilient to tapering pressures and is likely to remain so in 2014. Short-term risks appear moderate, and are most closely linked to the recent drought and the impact of a weak monsoon on growth and the balance of payments. Medium-term risks are linked to slower than expected global recovery, an unexpected potential tightening of external liquidity which could affect rollovers and borrowing costs, and slower-than-projected gains in revenue.”



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