IMF Press Briefing on Sri Lanka Opening Remarks
IMF News, May 15, 2023
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- Published: May 15, 2023
Global and Asia-Pacific outlook
- 2023 outlook:
- Global growth is expected to decelerate and bottom out in 2023.
- Global inflation is easing but remains stubbornly high.
- Banking strains in the U.S. and Europe have injected greater uncertainty.
- Asia-Pacific specifics:
- Growth in Asia and the Pacific is projected to increase this year to 4.6 percent, up from 3.8 percent in 2022.
- The region would contribute around 70 percent to global growth.
- Growth in the region is expected to fall to 3.9 percent five years out.
- Drivers and risks:
- Asia’s dynamism will be driven primarily by the recovery in China and resilient growth in India.
- Risks include stickier global and regional price pressures, a disconnect between market views and central bank communication in advanced economies, additional turmoil in global financial markets, adverse spillovers from China’s medium-term growth slowdown, and deeper geo-economic fragmentation.
- Domestic concerns:
- Headline inflation has been easing but remains above targets in most countries.
- Core inflation has proven to be sticky.
- Vulnerabilities to global financial tightening and volatile market conditions, especially in the corporate and household sectors, remain elevated.
Situation in Sri Lanka and macro projections
- Crisis context:
- Sri Lanka has been facing a severe crisis because of past policy missteps and back-to-back economic shocks.
- Concern about impact on the poor and vulnerable and costs of delayed access to external financing.
- IMF program and financing:
- On March 20, the IMF Executive Board approved a 48-month Extended Fund Facility of about 3 billion U.S.dollars to support Sri Lanka's economic policies and reforms.
- Sri Lanka immediately received an initial disbursement of about $330 million from the EFF arrangement.
- The EFF disbursement is expected to catalyze new external financing including from the Asian Development Bank and the World Bank.
- Growth and near-term outlook:
- Given the weak external environment and domestic policy tightening, the economy is expected to contract by 3 percent in 2023, before registering a modest growth of 1.5 percent in 2024.
- Prospects hinge critically on implementation of the economic reform program.
- IMF engagement:
- An IMF staff team, led by Peter Breuer, is in Sri Lanka and will be here until May 23 for regular consultations ahead of the first review mission later this year.
- The team will communicate further at the end of its visit.
Reform program pillars supported under the EFF arrangement
- The program prioritizes five key pillars:
1. Ambitious revenue-based fiscal consolidation, accompanied by stronger social safety nets, fiscal institutional reforms, and cost recovery-based energy pricing to ensure the state's ability to support all its essential expenditures. 2. Restoration of public debt sustainability including through a debt restructuring to ensure stable financing of the government's operations. 3. A multi-pronged strategy to restore price stability and rebuild reserves under greater exchange rate flexibility to alleviate the burden of inflation, particularly on the poor, to foster an environment of investment and growth, and to ensure Sri Lanka's ability to purchase essential goods from abroad. 4. Policies to safeguard financial sector stability, to ensure that the financial sector can play its key role in supporting economic growth. 5. Structural reforms to address corruption vulnerabilities and enhance growth; anti-corruption and governance reforms are imperative to ensure reforms benefit the Sri Lankan people.
- Governance diagnostic:
- Sri Lanka is the first country in Asia that has undergone the IMF governance diagnostic exercise.
- The IMF governance diagnostic report is expected to be published by September this year.
- The mission visited Colombo in March and engaged closely with stakeholders and civil society organizations on this critical reform area.
Implementation, social protection, and policy priorities
- Implementation emphasis:
- It is essential to continue the reform momentum under strong ownership by the authorities and the Sri Lankan people.
- The key is implementation.
- Social impact mitigation:
- Economic impact of the reforms on the poor and vulnerable needs to be mitigated with appropriate measures.
- The IMF welcomes the authorities' firm commitment to strengthen social safety nets, including through:
- A minimum spending floor.
- Well-targeted spending through the new social registry.
- Establishment of objective eligibility criteria.
- Financial-sector and macro priorities:
- Restore price stability and rebuild reserves under greater exchange rate flexibility.
- Restore public debt sustainability, including debt restructuring.
- Safeguard financial sector stability so it can support economic growth.
Final remarks and next steps
- The IMF-supported program is presented as an opportunity for all Sri Lankans to come together to restore economic stability and put the country on a sustainable growth path.
- The IMF is committed to help Sri Lanka along the way.
IMF Press Briefing on Sri Lanka Opening Remarks by Krishna Srinivasan, Director of Asia and Pacific Department, Colombo, Sri Lanka, May 15, 2023
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