IMF Completes First Review of the Extended Arrangement Under the EFF with Sri Lanka and Approves US$162.6 Million Disbursement

IMF News, November 18, 2016

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Canonical URL: IMF Completes First Review of the Extended Arrangement Under the EFF with Sri Lanka and Approves US$162.6 Million Disbursement

IMF Executive Board completed the first review of Sri Lanka’s Extended Fund Facility (EFF) arrangement.
Completion enables disbursement of the equivalent of SDR 119.894 million (about US$ 162.6 million).
Total disbursements under the arrangement to date: the equivalent of SDR 239.788 million (about US$ 325.1 million).
Original three-year extended arrangement approved on June 3, 2016 in the amount of about SDR 1.1 billion (US$1.45 billion, or 185 percent of quota).

Program aims: reduce the fiscal deficit, rebuild foreign exchange reserves, and introduce a simpler, more equitable tax system to restore macroeconomic stability and promote inclusive growth.
IMF assessment (Tao Zhang): performance under the Fund-supported program has been broadly satisfactory despite challenging circumstances.
Observed developments:
- Macroeconomic and financial conditions have begun to stabilize.
- Inflation has trended down.
- Balance of payments has improved.
- International reserves remain below comfortable levels.

Fiscal performance described as encouraging.
Specific fiscal measures and instruments:
- Reinstatement of the amendments to the value added tax expected to help boost revenues.
- 2017 budget proposal aims to strengthen government finances through revenue mobilization and to guard against revenue shortfalls by aligning spending with revenue on a quarterly basis.
- New Inland Revenue Act scheduled for early next year expected to result in a more efficient, transparent, and broad-based tax system.
Complementary structural reforms emphasized as critical for durable fiscal consolidation:
- Tax administration reforms.
- Public financial management reforms.
- Governance and oversight reforms of state-owned enterprises.

Inflation has abated, but credit growth remains strong.
Central bank stance:
- Indicates readiness to tighten monetary policy further if inflationary pressures resurge or credit growth persists.
- Authorities intend to continue building up reserves through outright purchases while allowing for greater exchange rate flexibility.

Current assessment: the banking sector is currently well capitalized.
Actions underway: steps are being taken to find a resolution mechanism for the distressed financial institutions.
Identified needs going forward:
- Strengthen the supervisory and regulatory framework.
- Identify and mitigate vulnerabilities in the financial sector, particularly regarding non-banks and state-owned banks.

IMF Press Release No. 16/515, November 18, 2016.

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