{
  "title": "Public Information Notice: IMF Executive Board Concludes 2006 Article IV Consultation with Sri Lanka",
  "publication": "IMF News, November 13, 2006",
  "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/53/pn06132",
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  "summary": "Each Public Information Notice contains a background section, a table of selected economic indicators, and an Executive Board assessment.",
  "publishDate": "2006-11-13",
  "sections": [
    {
      "heading": "Background and recent macro developments",
      "content": "- Real GDP increased by 6 percent in 2005 and by a further 8 percent in the first quarter of 2006.\n- Growth drivers: domestic demand, improved agricultural performance, strong tsunami-reconstruction efforts, and robust service sector growth.\n- Inflation developments:\n  - Declined from 18 percent in January 2005 to 3.5 percent at end-2005.\n  - Has risen since early 2006 due to fast credit growth, pass-through of higher oil prices, and increases in wages and pension payments.\n- Security and political risks:\n  - Recent escalation of hostilities and deterioration in the security situation following unsuccessful June peace talks.\n  - Weakening in confidence could affect investment going forward.\n  - Government and main opposition party (UNP) signed a Memorandum of Understanding on five key policy areas (the ethnic conflict, electoral reform, good governance, social development, and structure for collaboration)."
    },
    {
      "heading": "Fiscal position and public debt",
      "content": "- Fiscal outcomes:\n  - 2005 fiscal deficit widened to 8.7 percent of GDP, larger than budgeted, mainly because of tsunami-related spending.\n  - Excluding tsunami-related flows, the 2005 budget deficit was 7.5 percent of GDP (compared to 8.2 percent of GDP in 2004).\n  - First half of 2006: fiscal deficit contained through adjustment of capital expenditures; tax revenue grew 23 percent (below the 27 percent budget target).\n  - Sizable overruns on recurrent expenditure from oil subsidies, pensions, and additional security and humanitarian spending.\n- Debt dynamics:\n  - Total public debt declined by 11 percent of GDP (to 94 percent of GDP) in 2005.\n  - Sri Lanka received a Fitch rating of BB- in December 2005; outlook revised from stable to negative amid renewed security concerns.\n  - Government put planned global bond issuance on hold and mobilized resources from domestic investors during April-September 2006.\n- Fiscal targets endorsed by Directors:\n  - Adhering to the 2006 budget target and reducing the fiscal deficit target to 7½ percent of GDP in 2007.\n  - Plan to bring the fiscal deficit down to 5 percent by 2010, to be achieved through revenue enhancing policies and rationalization of current spending.\n  - Recommendation to limit further recourse to commercial borrowing for budgetary purposes."
    },
    {
      "heading": "External sector and reserves",
      "content": "- Current account and balances:\n  - Current account deficit narrowed in 2005 but projected to increase by end-2006 due to higher oil prices and strong demand for non-oil imports.\n  - Tsunami-related inflows slowed in 2006 while the debt service burden rose.\n- Reserves and exchange rate:\n  - Gross official reserves hovering around $2.4 billion, equivalent to 2.4 months of imports and 86 percent of short-term debt.\n  - Rupee-dollar exchange rate weakened somewhat since the second half of 2005.\n  - Real effective exchange rate (REER) appreciated by 2 percent during the same period (reflecting high domestic inflation relative to trading partners).\n- Board recommendations:\n  - Limit intervention in the foreign exchange market and allow greater flexibility in the exchange rate to help safeguard external reserves and maintain competitiveness."
    },
    {
      "heading": "Monetary policy, credit growth, and financial sector soundness",
      "content": "- Monetary tightening:\n  - Central bank raised its policy rate five times (cumulative 2 percentage points) during November 2004-December 2005, and by another 1 percentage point recently.\n  - Interest rates of government securities increased by about 1¼ percentage points since September 2006.\n  - Reserve money growth reduced to 16 percent in August 2006 (from 21 percent in April 2006).\n- Credit and banking:\n  - Credit growth to the private sector (including housing loans) about 23 percent in August 2006, contributing to demand pressures.\n  - NPL ratios of state-owned banks declined from 18 percent in 2003 to 8 percent in June 2006, reaching similar levels to domestic banks.\n  - Capital adequacy ratios improved (to 8 percent of total assets).\n  - Concerns remain about fast credit growth and credit quality.\n- Regulatory progress:\n  - Steps taken to further enhance the regulatory and supervisory framework, including plans to adopt the Basel II capital accord by 2008.\n  - Directors welcomed an FSAP update planned for 2007 and encouraged timely implementation of the Basel Core Principles."
    },
    {
      "heading": "Structural priorities and sectoral issues",
      "content": "- Infrastructure:\n  - Priority on power and roads; emphasis on restoring financial viability of the power sector and expanding generation capacity using more cost-efficient sources (including coal power).\n  - Development forum planned for early 2007.\n- Energy sector:\n  - Encourage efforts to reduce quasi fiscal losses of energy companies through electricity tariff adjustments, balance sheet restructuring, and enhanced operational efficiency.\n  - Need for safety nets to protect low-income households and strengthened regulatory guidelines to broaden investor base for long-term energy financing.\n- Trade and taxation:\n  - Directors encouraged an open trade regime with minimum distortions; curtail the cess regime and integrate fees in the tariff structure.\n  - A single low tariff structure could help maximize efficiency.\n  - Importance of further tax system reform and financial sector reforms to raise growth and reduce vulnerability.\n- Social policy:\n  - Commended improvements in social indicators over the last decade and emphasis on reducing rural poverty and narrowing rural-urban income inequality.\n  - Welcomed extensive consultations with stakeholders to build consensus for the national development strategy.\n- Data and governance:\n  - Encouraged improved quality and coverage of fiscal statistics and resolution of remaining issues to meet SDDS requirements.\n  - Welcomed passage of anti-money laundering legislation in 2006."
    },
    {
      "heading": "Executive Board assessment — policy guidance",
      "content": "- Near-term policy focus:\n  - Reduce inflation and external vulnerabilities.\n  - Further monetary tightening may be needed to contain credit growth and anchor inflation expectations.\n- Fiscal consolidation:\n  - Strong fiscal adjustment critical to avoid adverse debt dynamics and preserve ability to meet poverty reduction and Millennium Development Goals.\n  - Develop a well-defined medium-term fiscal policy framework and improvements to debt management.\n- Financial stability:\n  - Further strengthen prudential standards and monitoring of systemic risks.\n  - Further restructuring of two large public banks should focus on improving lending practices and strengthening capital adequacy."
    },
    {
      "heading": "Selected economic indicators (key figures)",
      "content": "- Real GDP growth (percent): 2002: 4.0; 2003: 6.0; 2004: 5.4; 2005: 7.0; 2006 Proj.: ...\n- Inflation (percent, end of period, Sri Lanka consumer price index): 2002: 6.6; 2003: 1.0; 2004: 16.8; 2005: 3.6; 2006 Proj.: 12.0\n- National savings (percent of GDP): 2002: 19.5; 2003: 21.6; 2004: 23.7; 2005: 22.6\n- Gross investment (percent of GDP): 2002: 21.2; 2003: 22.1; 2004: 25.0; 2005: 26.5; 2006 Proj.: 27.3\n- Revenue (percent of GDP): 2002: 16.5; 2003: 15.7; 2004: 15.3; 2005: 16.1; 2006 Proj.: 17.0\n- Expenditure (percent of GDP): 2002: 25.4; 2003: 24.0; 2004: 23.5; 2005: 24.7; 2006 Proj.: 26.0\n- Overall deficit (percent of GDP) 2/ (Excluding grants and privatization receipts): 2002: -8.9; 2003: -8.3; 2004: -8.2; 2005: -8.7; 2006 Proj.: -9.1\n- Total government debt (percent of GDP): 2002: 105.6; 2003: 105.8; 2004: 105.4; 2005: 93.9; 2006 Proj.: 89.6\n- Exports (in millions of U.S. dollars): 2002: 4,699; 2003: 5,133; 2004: 5,757; 2005: 6,347; 2006 Proj.: 6,950\n- Imports (in millions of U.S. dollars): 2002: 6,105; 2003: 6,673; 2004: 7,999; 2005: 8,863; 2006 Proj.: 10,501\n- Current account balance (in millions of U.S. dollars): 2002: -236; 2003: -74; 2004: -646; 2005: -650; 2006 Proj.: -1,281\n- Current account balance (in percent of GDP): 2002: -1.4; 2003: -0.4; 2004: -3.2; 2005: -2.8; 2006 Proj.: -4.7\n- Capital and financial account balance (in millions of U.S. dollars): 2002: 444; 2003: 722; 2004: 632; 2005: 1,224; 2006 Proj.: 1,556\n- Of which, direct investment 3/ (in millions of U.S. dollars): 2002: 186; 2003: 201; 2004: 227; 2005: 234; 2006 Proj.: 324\n- Gross official reserves (excluding ACU balances, in millions of U.S. dollars): 2002: 1,560; 2003: 2,146; 2004: 1,833; 2005: 2,458; 2006 Proj.: 2,662\n- Gross official reserves (in months of prospective imports): 2002: 2.4; 2003: 2.8; 2004: 2.2; 2005: 2.5\n- Real effective exchange rate (percent change, period average) 4/: 2002: 0.1; 2003: -4.9; 2004: -5.1; 2005: 8.8\n- External debt (in percent of GDP): 2002: 62.6; 2003: 64.1; 2004: 63.9; 2005: 55.4; 2006 Proj.: 49.2\n- Debt service (in percent of goods and services exports) 5/: 2002: 12.3; 2003: 10.9; 2004: 10.1; 2005: 7.4; 2006 Proj.: 10.4\n- Broad money growth (annual percent change) 6/: 2002: 13.4; 2003: 19.6; 2004: 19.1\n- Of which, net credit to government: 2002: -4.2; 2003: 25.1; 2004: 11.9\n- Of which, credit to the private sector: 2002: 16.9; 2003: 21.5; 2004: 20.7\n- Interest rate (percent, end of period) 7/ (Three-month treasury bill rate): 2002: 9.9; 2003: 7.3; 2004: 11.8\n\nPublic Information Notice (PIN) No. 06/132 — November 13, 2006. Executive Board concluded the Article IV consultation with Sri Lanka on October 25, 2006.\n\n---\n\n\n References\n\n- Sri Lanka and the IMF\n- Public Information Notices\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/53/pn06132"
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    "Published: November 13, 2006",
    "Real GDP increased by 6 percent in 2005 and by a further 8 percent in the first quarter of 2006.",
    "Growth drivers: domestic demand, improved agricultural performance, strong tsunami-reconstruction efforts, and robust service sector growth.",
    "Inflation developments:",
    "Security and political risks:",
    "Fiscal outcomes:",
    "Debt dynamics:",
    "Fiscal targets endorsed by Directors:",
    "Current account and balances:",
    "Reserves and exchange rate:",
    "Board recommendations:",
    "Monetary tightening:",
    "Credit and banking:",
    "Regulatory progress:",
    "Infrastructure:",
    "Energy sector:",
    "Trade and taxation:",
    "Social policy:",
    "Data and governance:",
    "Near-term policy focus:",
    "Fiscal consolidation:",
    "Financial stability:",
    "Real GDP growth (percent): 2002: 4.0; 2003: 6.0; 2004: 5.4; 2005: 7.0; 2006 Proj.: ...",
    "Inflation (percent, end of period, Sri Lanka consumer price index): 2002: 6.6; 2003: 1.0; 2004: 16.8; 2005: 3.6; 2006 Proj.: 12.0",
    "National savings (percent of GDP): 2002: 19.5; 2003: 21.6; 2004: 23.7; 2005: 22.6",
    "Gross investment (percent of GDP): 2002: 21.2; 2003: 22.1; 2004: 25.0; 2005: 26.5; 2006 Proj.: 27.3",
    "Revenue (percent of GDP): 2002: 16.5; 2003: 15.7; 2004: 15.3; 2005: 16.1; 2006 Proj.: 17.0",
    "Expenditure (percent of GDP): 2002: 25.4; 2003: 24.0; 2004: 23.5; 2005: 24.7; 2006 Proj.: 26.0",
    "Overall deficit (percent of GDP) 2/ (Excluding grants and privatization receipts): 2002: -8.9; 2003: -8.3; 2004: -8.2; 2005: -8.7; 2006 Proj.: -9.1",
    "Total government debt (percent of GDP): 2002: 105.6; 2003: 105.8; 2004: 105.4; 2005: 93.9; 2006 Proj.: 89.6",
    "Exports (in millions of U.S. dollars): 2002: 4,699; 2003: 5,133; 2004: 5,757; 2005: 6,347; 2006 Proj.: 6,950",
    "Imports (in millions of U.S. dollars): 2002: 6,105; 2003: 6,673; 2004: 7,999; 2005: 8,863; 2006 Proj.: 10,501",
    "Current account balance (in millions of U.S. dollars): 2002: -236; 2003: -74; 2004: -646; 2005: -650; 2006 Proj.: -1,281",
    "Current account balance (in percent of GDP): 2002: -1.4; 2003: -0.4; 2004: -3.2; 2005: -2.8; 2006 Proj.: -4.7",
    "Capital and financial account balance (in millions of U.S. dollars): 2002: 444; 2003: 722; 2004: 632; 2005: 1,224; 2006 Proj.: 1,556",
    "Of which, direct investment 3/ (in millions of U.S. dollars): 2002: 186; 2003: 201; 2004: 227; 2005: 234; 2006 Proj.: 324",
    "Gross official reserves (excluding ACU balances, in millions of U.S. dollars): 2002: 1,560; 2003: 2,146; 2004: 1,833; 2005: 2,458; 2006 Proj.: 2,662",
    "Gross official reserves (in months of prospective imports): 2002: 2.4; 2003: 2.8; 2004: 2.2; 2005: 2.5",
    "Real effective exchange rate (percent change, period average) 4/: 2002: 0.1; 2003: -4.9; 2004: -5.1; 2005: 8.8",
    "External debt (in percent of GDP): 2002: 62.6; 2003: 64.1; 2004: 63.9; 2005: 55.4; 2006 Proj.: 49.2",
    "Debt service (in percent of goods and services exports) 5/: 2002: 12.3; 2003: 10.9; 2004: 10.1; 2005: 7.4; 2006 Proj.: 10.4",
    "Broad money growth (annual percent change) 6/: 2002: 13.4; 2003: 19.6; 2004: 19.1",
    "Of which, net credit to government: 2002: -4.2; 2003: 25.1; 2004: 11.9",
    "Of which, credit to the private sector: 2002: 16.9; 2003: 21.5; 2004: 20.7",
    "Interest rate (percent, end of period) 7/ (Three-month treasury bill rate): 2002: 9.9; 2003: 7.3; 2004: 11.8",
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