IMF Staff Concludes Visit to Sri Lanka to Discuss Progress of Economic Reform Program

IMF News, March 7, 2017

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Press Release No. 17/75; mission visited Colombo during February 21-March 7, 2017.
A staff team from the International Monetary Fund (IMF) led by Jaewoo Lee held discussions on the second review of the Sri Lankan authorities’ economic program supported by a three-year Extended Fund Facility (EFF).
Statement: “The mission made significant progress toward reaching a staff level agreement with the government on completion of the second review. Discussions will continue in April in Washington D.C. during the Spring Meetings of the IMF and World Bank.”

Macroeconomic performance in the second half of 2016 was mixed with gradually recovering growth and an uptick in inflation due to the impact of drought and the VAT increase.
The current account remained stable, but the financial account weakened with the resumption of capital outflows.
Risk highlighted: “A more prolonged drought could raise food and oil imports with adverse impact on growth, inflation, and the balance of payment.”

The mission commends the authorities for strong efforts in implementing their IMF-supported economic reform program with all fiscal quantitative targets through end-December being met.
“Substantial progress has been made in stepping up revenue collections and automating revenue administration, which has been the basis for meeting fiscal targets.”
Policy priority: advance the legislative process for the new Inland Revenue Act, with effective public consultations, described as “a critical step towards rebalancing the tax system toward a more predictable, efficient and equitable structure.”

Net international reserves fell short of the target.
The mission encouraged the Central Bank of Sri Lanka (CBSL) to take stronger actions towards rebuilding international reserves and maintaining exchange rate flexibility.
The mission discussed IMF technical assistance to facilitate transition to a flexible inflation targeting framework.

Progress on implementing structural benchmarks was somewhat uneven with some reforms lagging behind intended timelines.
The mission encourages accelerating implementation of structural reforms in public financial management and state owned enterprises (SOEs), building on substantial technical assistance received so far.
Specific step for SOE reform: finalizing and publishing Statements of Corporate Intents for large SOEs as “the first necessary step for enhancing transparency and accountability in the reform process.”
The mission supports ongoing work to design reforms in the business environment and competitiveness, supported by a number of development partners.

Fiscal:
- Continue on revenue based fiscal consolidation to generate adequate resources to support social and development objectives while maintaining debt sustainability.
- Advance the legislative process for the new Inland Revenue Act with effective public consultations.
Monetary and external:
- CBSL should remain vigilant in monitoring inflation pressures and stand ready to tighten monetary policy if inflation or credit growth does not abate.
- Take stronger actions to rebuild international reserves and maintain exchange rate flexibility.
- Consider IMF technical assistance for transition to a flexible inflation targeting framework.
Structural and governance:
- Accelerate structural reforms in public financial management and SOEs.
- Finalize and publish Statements of Corporate Intents for large SOEs to enhance transparency and accountability.
- Continue reforms to improve the business environment and competitiveness with development partner support.

The mission met with Prime Minister Wickremesinghe, Finance Minister Karunanayake, Governor of the Central Bank of Sri Lanka Coomaraswamy, parliamentarians, other public officials, and representatives of the business community, civil society and international partners.
Staff will prepare a report, subject to management approval, to be presented to the IMF's Executive Board for discussion and decision.

IMF Press Release No. 17/75, March 7, 2017.