A staff team from the International Monetary Fund (IMF) led by Manuela
Goretti visited Colombo during January 29 – February 7, 2020 to meet with
the new administration and discuss its policy agenda. At the conclusion of
the staff visit, Ms. Goretti issued the following statement:
“The IMF staff team had constructive discussions with the Sri Lankan
authorities on recent economic developments and the country’s economic
reform agenda. Given the high level of public debt and refinancing needs in
the country, ensuring macroeconomic stability calls for fiscal
consolidation, prudent monetary policy, and sustained efforts to build
international reserves. Ambitious structural and institutional reforms
remain critical to raise the country’s growth potential and promote
inclusiveness.
“The economy is gradually recovering from the terrorist attacks last
April. Real GDP growth is estimated at 2.6 percent in 2019. The
recovery is
supported by a solid performance of the manufacturing sector and a rebound
in tourism and related services in the second half of the year. High
frequency indicators continue to improve and growth is projected to rebound
to 3.7 percent in 2020, on the back of the recovery in tourism, and
assuming that the Novel Coronavirus will have only limited negative effect
on tourism arrivals and other economic activities. Inflation is projected
to remain at around 4½ percent, in line with the Central Bank of Sri Lanka
(CBSL) target. After a sharp import contraction in 2019, the current
account deficit is expected to widen to nearly 3 percent of GDP in 2020.
“Preliminary data indicate that the primary surplus target under the
program supported by the Extended Fund Facility (EFF) was missed by a
sizable margin in 2019 with a recorded deficit of 0.3 percent of GDP, due
to weak revenue performance and expenditure overruns. Under current
policies, as discussed with the authorities during the visit, the primary
deficit could widen further 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. Given risks to debt sustainability
and large refinancing needs over the medium term, renewed efforts to
advance fiscal consolidation will be essential for macroeconomic stability.
Measures to improve efficiency in the public administration and strengthen
revenue mobilization can help reduce the 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.
“The CBSL should continue to follow a prudent and data-dependent monetary
policy and stand ready to adjust rates to evolving macroeconomic
conditions. 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.
However, conditions have since stabilized. Renewed efforts are needed to
rebuild reserve buffers to safeguard resilience to shocks, under a flexible
exchange rate. 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.
“The financial system remains broadly stable, although some pockets of
vulnerability remain, especially among non-bank financial institutions.
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, with a view to strengthening and harmonizing regulation,
supervision, and resolution frameworks for deposit-taking financial
institutions would help safeguard financial stability.
“The authorities should move ahead with growth-enhancing structural reforms
to fully harness Sri Lanka’s economic potential and foster greater social
inclusion. The team welcomed the authorities’ plans to enhance the
efficiency of state-owned enterprises, enabling them to operate on a sound
commercial basis. These plans would need to be supported by a visible
commitment to strengthen governance and transparency, notably in the energy
sector, and renewed efforts to tackle corruption. Concerted initiatives are
needed to foster the business climate, promote trade openness and
investment, and strengthen infrastructure sustainably, including to respond
to the challenges from climate change. Sri Lanka stands to gain from
greater female labor participation, enhancements in social protection, and
further investment in education and skills.”
The team met with the 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.
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Sri Lanka: Selected Economic Indicators
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2016
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2017
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2018
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2019
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2020
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6th EFF Review
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Est.
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6th EFF Review
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Proj.
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Output
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Real GDP growth (%)
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4.5
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3.4
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3.2
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2.7
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2.6
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3.5
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3.7
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Prices
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Inflation (average, %) 1/
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4.0
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6.6
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4.3
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4.4
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4.3
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4.8
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4.8
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Central government finances
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Revenue and grants (% GDP)
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14.1
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13.7
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13.4
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12.8
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12.2
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13.9
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11.3
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Expenditure (% GDP)
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19.5
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19.2
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18.6
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18.6
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18.4
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19.2
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19.2
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Primary balance (% GDP)
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-0.2
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0.0
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0.6
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0.2
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-0.3
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0.7
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-1.9
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Overall balance (% GDP)
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-5.3
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-5.5
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-5.3
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-5.7
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-6.2
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-5.3
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-7.9
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Central government debt (% GDP)
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79.0
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77.4
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83.3
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83.2
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84.2
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82.4
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84.6
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Public debt (% GDP) 2/
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84.1
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82.7
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90.0
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89.9
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91.0
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89.2
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91.4
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Money and credit
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Broad money (% change)
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18.4
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16.7
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13.0
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7.0
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7.0
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10.6
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10.3
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Credit to the private sector (% change)
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21.6
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14.7
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15.9
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5.7
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4.5
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10.7
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10.1
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Balance of payments
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Current account (% GDP)
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-2.1
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-2.6
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-3.2
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-2.6
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-2.5
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-2.8
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-2.9
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FDI (% GDP)
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0.8
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1.5
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1.7
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1.7
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1.4
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1.7
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1.4
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Reserves (US$ millions)
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6,019
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7,959
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6,919
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8,168
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7,642
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9,120
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8,190
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Reserves (months imports)
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2.8
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3.6
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3.4
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3.6
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3.4
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3.8
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3.4
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External debt (% GDP)
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56.3
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57.5
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58.8
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63.8
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63.9
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62.3
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62.1
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Sources: Data provided by the Sri Lankan authorities and
IMF staff estimates.
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1/ Colombo CPI.
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2/ Comprising central government debt, publicly guaranteed
debt, and Fund credit outstanding. Preliminary data for
2019 include cash disbursements of foreign-financed loans
linked to expenditure on projects authorized and recorded
in 2020.
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