Srilankan Airlines has been operating at a loss and there is strong opposition to proposals to privatise the National airline.
The IMF said in a statement today the Sri Lankan economy has good underlying momentum but is starting to show signs of strain from a combination of an increasingly difficult external environment and challenging policy adjustments.
The IMF said that despite an improvement in the terms of trade from low world oil prices, the overall balance of payments deteriorated in 2015. Negative export growth, flat inward remittance flows, and a sharp decline in net capital inflows more than offset robust growth in tourism and the windfall from lower oil and other commodity prices. As a result, gross international reserves declined from 4.3 months of imports in 2014 to 3.8 months in 2015. Financial soundness indicators are generally favorable, with banks’ capital adequacy remaining comfortably above regulatory limits.
Sri Lanka’s prospects for the medium-term appear favorable if current macro-financial imbalances can be addressed. Real GDP is projected to rise to 5 percent in 2016, supported by a recovery in construction and sustained momentum in services including tourism, transport, and IT.
While the Government seeks to undertake sizable fiscal consolidation and tackle high priority structural reforms, growth momentum can be sustained with a solid commitment to reform, a clear direction on macroeconomic policies, and restoration of market confidence.
Sri Lanka’s medium-term growth prospects are generally favorable, given its strong base of human and physical capital and strategic position in a fast growing and dynamic region. The key risks to the outlook, both short- and medium-term, stem from Government inaction on key policies and a significant deterioration in the external environment, the IMF said.
To support their economic program over 2016–19, the authorities have requested the IMF’s financial assistance. The program seeks to: (i) implement a structural increase in revenues; (ii) reverse the decline in central bank foreign exchange reserves; (iii) reduce public debt relative to GDP and lower Sri Lanka’s risk of debt distress; (iv) enhance public financial management and improve the operations of state owned enterprises; (v) transition toward flexible inflation targeting with a flexible exchange rate regime; and (vi) promote sustainable and inclusive economic growth by enabling stronger trade and investment. The program will be supported by a 3-year Extended Arrangement under the Extended Fund Facility.
IMF Executive Directors noted that despite positive growth momentum, the Sri Lankan economy is facing challenges due to the difficult external environment and a period of significant political transition. Directors welcomed the authorities’ commitment to strengthen macroeconomic and financial stability by putting public finances on a more sustainable path, rebuilding foreign exchange reserves, and undertaking reforms to foster sustainable and inclusive growth. They emphasized that steadfast implementation of prudent policies under the Fund-supported program will be important to improve market confidence and encourage investment.
Directors welcomed the authorities’ commitment to reduce the fiscal deficit and underscored that well-designed growth-friendly consolidation efforts will be necessary to ensure fiscal and debt sustainability. They emphasized that priority should be given to enhancing revenues through the implementation of new tax legislation, eliminating exemptions, building capacity in revenue administration, and tightening expenditure management. They also highlighted the importance of pushing ahead with state enterprise reform, including expeditious resolution of Sri Lankan Airlines. Implementation of automatic pricing mechanisms for fuel and electricity prices will also help reduce fiscal risk. (Colombo Gazette)