At the same time, they noted that fiscal risks and reduced external buffers pose challenges, underscoring the need for greater efforts to strengthen the policy framework and reduce vulnerabilities.
The IMF, in a statement, also welcomed the authorities’ commitment to fiscal consolidation. However, they noted with concern that the deficit target under the revised 2015 budget relies to a large extent on one-off revenue measures. Given the risks associated with the high public debt, Directors urged the authorities to adopt more ambitious measures to contain current expenditure while protecting priority social and high value-added infrastructure spending. They emphasized that a strengthening of the fiscal framework is needed to support consolidation and debt reduction. Comprehensive tax policy and administration reforms, including tax expenditure reductions and simplification of the tax system to broaden the revenue base, will be crucial elements in a medium-term fiscal reform strategy.
The IMF noted the resumption of private credit growth following monetary easing in 2013-14. They advised close monitoring of credit and inflation developments, given the potential turn in the credit cycle and long lags in monetary transmission. They stressed that it is important to be prepared to act if signs of overheating emerge.
The IMF Executive Board welcomed the authorities’ efforts to address weaknesses in the external sector, including plans to establish new swap lines and rebuild external reserve buffers. In this context, they underscored the importance of exchange rate flexibility in protecting international reserves and facilitating external adjustment. Further structural reforms will also be needed to raise productivity and improve the business climate and competitiveness.
IMF Directors welcomed the reduction in banks’ nonperforming assets and the authorities’ efforts to bolster supervision and regulation. They highlighted the need for a strong supervisory and clear crisis management framework to be extended to the nonbank sector. They encouraged the authorities to move expeditiously to provide clarity to markets regarding financial sector consolidation.
The Directors agreed to extend post-program monitoring in light of risks and the desirability of maintaining a close policy discussion between the authorities and the Fund. Directors looked forward to the new government’s comprehensive economic policy agenda. (Colombo Gazette)