IMF reaches staff level agreement on sixth review with Sri Lanka

The International Monetary Fund (IMF) has reached a Staff Level Agreement on the Sixth Review of Sri Lanka’s Extended Fund Facility.

In a media statement today the IMF said that based on the findings so far, staff will prepare a report that, subject to management approval, will be presented to the IMF’s Executive Board for discussion and decision.

“We welcome the authorities’ commitment to fiscal discipline and institutional reforms to anchor debt sustainability, while providing space to support the ongoing recovery and social goals,” the IMF said.

The IMF noted that the new Central Bank Act will be a landmark reform in the roadmap towards flexible inflation targeting, strengthening the Central Bank of Sri Lanka’s mandate, governance, accountability, and transparency, in line with international best practice.

Trade and investment liberalization, SOE reforms, and stepped-up anti-corruption efforts will be important to bolster Sri Lanka’s competitiveness and medium-term growth, the IMF added.

A staff team from the International Monetary Fund (IMF) led by Manuela Goretti visited Colombo during September 10-25, 2019 to conduct the sixth review under Sri Lanka’s economic reform program supported by a four-year Extended Fund Facility (EFF) arrangement.

“The team reached understandings at the staff level with the Sri Lankan authorities on the sixth review of the EFF-supported program. The authorities are taking steps to complete all the pending actions and structural benchmarks for this review over the next few weeks,” Ms. Goretti said.

She said the team welcomed the authorities’ efforts to normalize the security situation in the country after the tragic terrorist attacks in April and mitigate the impact of the shock on the economy.

Real GDP growth was revised to 2.7 percent in 2019 and is projected to improve to 3.5 percent in 2020, as tourist arrivals and related activities gradually recover.

Inflation is expected to remain stable at around 4.5 percent during 2019-20. Despite the recent fall in tourist arrivals and remittances, the current account balance is projected to improve to 2.6 percent of GDP in 2019 on the back of lower imports and stronger exports supported by the exchange rate correction in late 2018.

“Sustaining prudent policies and implementing institutional reforms remain critical to preserve macroeconomic stability, given the weak global outlook and Sri Lanka’s sizable public debt,” she said.

She also said that the the protracted impact of the 2018 political crisis and the Easter attacks are significantly impacting fiscal performance. The end-June fiscal target was missed by a large margin, due to frontloading of spending from the clearing of arrears and externally-financed capital projects carried over from 2018 as well as a sharp fall in indirect revenues following the terrorist attacks.

While the program targets agreed at the time of the fifth review are no longer within reach, the authorities are committed to achieve a primary fiscal surplus of 0.2 percent of GDP in 2019, through implementation of remaining revenue measures in the 2019 budget and prudent expenditure management.

“Improving the financial performance of SriLankan Airlines and advancing energy sector reforms, including by tackling cost inefficiencies and subsidies in the electricity sector, remain critical steps to reduce fiscal risks,” the IMF added.

The team met with Prime Minister Wickremesinghe, Minister of Finance Samaraweera, State Minister of Finance Wickramaratne, Governor of the Central Bank of Sri Lanka Coomaraswamy, Secretary to the Treasury Samaratunga, Senior Deputy Governor Weerasinghe, other public officials, representatives of the Parliamentary Opposition, business community, civil society, and international partners.

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