IMF Staff Concludes Visit to Sri Lanka
IMF News, February 8, 2020
Source details
- Canonical URL
- IMF Staff Concludes Visit to Sri Lanka
Other formats
Bibliographic details
- Published: February 8, 2020
Mission context and main message
- Mission dates: January 29 – February 7, 2020.
- Team leader: Manuela Goretti.
- Statement type: End-of-mission press release conveying preliminary findings; views are those of IMF staff and do not necessarily represent the IMF’s Executive Board. This mission will not result in a Board discussion.
- Overarching messages:
- The economy is recovering from the terrorist attacks last April, with GDP growth projected at 3.7 percent in 2020.
- Ambitious structural and institutional reforms are needed to anchor policy priorities, bolster competitiveness and foster inclusive growth.
- Fiscal prudence remains critical to support macro-economic stability and market confidence, amid high levels of debt and refinancing needs.
Economic outlook and key projections
- Growth and inflation:
- Real GDP growth estimated at 2.6 percent in 2019.
- Growth projected to rebound to 3.7 percent in 2020.
- Growth projection contingent on limited negative effects from the Novel Coronavirus on tourism arrivals and other economic activities.
- Inflation projected to remain at around 4½ percent, in line with the Central Bank of Sri Lanka (CBSL) target.
- External sector:
- After a sharp import contraction in 2019, the current account deficit is expected to widen to nearly 3 percent of GDP in 2020.
- Staff note on drivers:
- Recovery supported by a solid performance of the manufacturing sector and a rebound in tourism and related services in the second half of 2019.
- High frequency indicators continue to improve.
Fiscal position, risks, and recommendations
- 2019 outcomes and 2020 risks:
- Preliminary data indicate the primary surplus target under the EFF-supported program was missed in 2019, with a recorded primary deficit of 0.3 percent of GDP.
- Under current policies, the primary deficit could widen to 1.9 percent of GDP in 2020 due to newly implemented tax cuts and exemptions, clearance of domestic arrears, and backloaded capital spending from 2019.
- Fiscal policy recommendations:
- Renewed efforts to advance fiscal consolidation are essential given risks to debt sustainability and large refinancing needs.
- Measures to improve efficiency in public administration and strengthen revenue mobilization can help reduce high public debt while preserving space for critical social and investment needs.
- Advancing relevant legislation to strengthen fiscal rules would anchor policy commitments, restore confidence, and safeguard sustainability over the medium term.
Monetary policy, reserves, and central bank governance
- Monetary policy stance:
- The CBSL should continue to follow a prudent and data-dependent monetary policy and stand ready to adjust rates to evolving macroeconomic conditions.
- Reserves:
- Net International Reserves fell short of the end-December target under the EFF-supported program in 2019 by about $100 million amid market pressures after the Presidential elections and announced tax cuts.
- Conditions have since stabilized, but renewed efforts are needed to rebuild reserve buffers to safeguard resilience to shocks under a flexible exchange rate.
- Central bank governance:
- Approval of the new Central Bank Law in line with international best practices is a critical step to further strengthen the independence and governance of the CBSL and support the adoption of flexible inflation targeting.
Financial sector and regulatory recommendations
- System stability:
- The financial system remains broadly stable, although pockets of vulnerability remain, especially among non-bank financial institutions.
- Policy measures:
- Caps on lending rates and the loan repayment moratorium for small and medium enterprises should be temporary to avoid unintended distortions and inefficiencies in financial intermediation.
- Modernizing the Banking Act to strengthen and harmonize regulation, supervision, and resolution frameworks for deposit-taking financial institutions would help safeguard financial stability.
Structural and institutional reforms
- Priority reform areas:
- Move ahead with growth-enhancing structural reforms to harness Sri Lanka’s economic potential and foster greater social inclusion.
- Enhance efficiency of state-owned enterprises so they operate on a sound commercial basis, supported by visible commitments to strengthen governance and transparency, notably in the energy sector, and renewed efforts to tackle corruption.
- Promote the business climate, trade openness, and investment; strengthen infrastructure sustainably, including responses to climate change challenges.
- Increase female labor participation, enhance social protection, and further invest in education and skills.
Engagements during the visit
- Meetings held with: Secretary to the President P B Jayasundera; CBSL Governor W D Lakshman; Secretary to the Treasury S R Attygalle; Senior Deputy Governor P N Weerasinghe; other public officials; representatives of the business community; civil society; and international partners.
Selected economic indicators (as reported)
- Output
- Real GDP growth (%): 2016: 4.5; 2017: 3.4; 2018: 3.2; 2019: 2.7 (Est.); 2019: 2.6; 6th EFF Review: 3.5; 2020 Proj.: 3.7
- Prices
- Inflation (average, %) 1/: 2016: 4.0; 2017: 6.6; 2018: 4.3; 2019: 4.4; 2020: 4.8
- Central government finances
- Revenue and grants (% GDP): 2016: 14.1; 2017: 13.7; 2018: 13.4; 2019: 12.8; 2019 Est.: 12.2; 6th EFF Review: 13.9; 2020 Proj.: 11.3
- Expenditure (% GDP): 2016: 19.5; 2017: 19.2; 2018: 18.6; 2019: 18.4; 2019 Est.: (not separately reported)
- Primary balance (% GDP): 2016: -0.2; 2017: 0.0; 2018: 0.6; 2019: 0.2; 2019 Est.: -0.3; 6th EFF Review: 0.7; 2020 Proj.: -1.9
- Overall balance (% GDP): 2016: -5.3; 2017: -5.5; 2018: -5.7; 2019: -6.2; 2019 Est.: -7.9
- Central government debt (% GDP): 2016: 79.0; 2017: 77.4; 2018: 83.3; 2019: 83.2; 2019 Est.: 84.2; 6th EFF Review: 82.4; 2020 Proj.: 84.6
- Public debt (% GDP) 2/: 2016: 84.1; 2017: 82.7; 2018: 90.0; 2019: 89.9; 2019 Est.: 91.0; 6th EFF Review: 89.2; 2020 Proj.: 91.4
- Money and credit
- Broad money (% change): 2016: 16.7; 2017: 13.0; 2018: 7.0; 2019: 10.6; 2019 Est.: 10.3
- Credit to the private sector (% change): 2016: 21.6; 2017: 14.7; 2018: 15.9; 2019: 5.7; 2019 Est.: 10.7; 2020 Proj.: 10.1
- Balance of payments
- Current account (% GDP): 2016: -2.1; 2017: -2.6; 2018: -3.2; 2019: -2.5; 2019 Est.: -2.8; 6th EFF Review: -2.9
- FDI (% GDP): 2016: 0.8; 2017: 1.5; 2018: 1.7; 2019: 1.4
- Reserves (US$ millions): 2016: 6,019; 2017: 7,959; 2018: 6,919; 2019: 8,168; 2019 Est.: 7,642; 6th EFF Review: 9,120; 2020 Proj.: 8,190
- Reserves (months imports): 2016: 2.8; 2017: 3.6; 2018: 3.8; 2019: 3.8
- External debt (% GDP): 2016: 56.3; 2017: 57.5; 2018: 58.8; 2019: 63.8; 2019 Est.: 63.9; 6th EFF Review: 62.3; 2020 Proj.: 62.1
Press Release No. 20/42