IMF Staff Concludes Visit to Sri Lanka

IMF News, August 2, 2024

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Real GDP posted three consecutive quarters of expansion.
Growth accelerated to 5.3 percent year-on-year in the first quarter of 2024.
Inflation remains contained below the Central Bank of Sri Lanka’s (CBSL) 5 percent target.
Domestic borrowing rates have declined.
Gross international reserves increased by US$1.2 billion during the first half of 2024 and reached US$5.6 billion.
Fiscal revenue collections increased during the first half of 2024.

The 2025 Budget needs to be underpinned by appropriate revenue measures and continued spending restraint to reach the medium-term primary balance objective of 2.3 percent of GDP.
The planned relaxation of import restrictions on motor vehicles will support revenue mobilization in 2025.
Tax administration reforms could further improve compliance, including by establishing a properly functioning VAT refund system for exporters by April 2025.
Any proposed measure eroding the fiscal position needs to be offset by compensating measures of high quality.
Avoiding new tax exemptions is recommended to reduce corruption risks and fiscal revenue leakages and to ensure a more predictable and transparent tax system.
Continuing to maintain energy prices at cost-recovery levels is critical to avoid potential fiscal costs.
Protecting the poor and the vulnerable through improved targeting and better coverage of cash transfers remains critical.
Policy slippages could jeopardize the recovery.

Recent parliamentary approval of the Public Financial Management Act and the Public Debt Management Act is highlighted as a milestone to improve fiscal discipline and prudent debt management.
Developing a holistic debt management strategy and establishing a well-structured and integrated Public Debt Management Office will help lower the government’s financing risks.
Commendable progress has been made in putting debt on a path towards sustainability.
Execution of the domestic debt restructuring and finalizing the agreements with the Official Creditor Committee and China EXIM Bank are major milestones.
IMF staff assessed the “Joint Working Framework” announced after the second round of restricted discussions with the bondholder committee and provided this assessment to the authorities and, on their request, the financial advisors of the bondholders.
The IMF encourages a swift resolution of the remaining steps to achieve debt sustainability and regain investor confidence and will continue to support Sri Lanka’s ongoing debt restructuring efforts.

Inflation anchoring should remain the priority of monetary policy to maintain price stability.
Safeguarding CBSL’s independence is important to maintain price stability.
Continued reserve accumulation and exchange rate flexibility remain key priorities.
Recent amendments to the Banking Act and related implementing regulations will help safeguard financial stability.
Authorities need to ensure the banking sector is adequately capitalized to allow the financial sector to contribute to economic growth.

The recently formulated National Anti-corruption Agenda, building on the authorities’ earlier governance action plan, is welcomed.
Steadfast implementation of governance reforms outlined in the Governance Diagnostic Report, prioritizing near-term commitments under the EFF program, is critical to addressing corruption risks and promoting a break from past policy missteps.
Ensuring an enabling environment for governance reforms is key to bolstering public confidence and facilitating implementation.

Progress in meeting key commitments under the IMF-supported program will be formally assessed in the context of the third review of the Extended Fund Facility (EFF) arrangement.
The timing of the third review will be discussed with the government after the recently announced presidential elections.
The IMF mission visited Sri Lanka from July 25 to August 2, 2024.
The mission met with President and Finance Minister Ranil Wickremesinghe, Central Bank of Sri Lanka Governor Dr. P. Nandalal Weerasinghe, Secretary to the Treasury Mr. K M Mahinda Siriwardana, other senior government and CBSL officials, Parliamentarians, private sector representatives, civil society organizations, and development partners.
The mission statement notes the visit will not result in a Board discussion and that the views expressed are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board.

IMF Staff Concludes Visit to Sri Lanka — August 2, 2024