June 14, Colombo: The International Monetary Fund says that the three-year, $1.5 billion loan it approved on June 3 for Sri Lanka under the Extended Fund Facility (EFF) to support the country's economic reform agenda will help Sri Lanka navigate macroeconomic policy adjustments and a more difficult external environment.
The global lending agency noted that Sri Lanka has gone through a significant political transition against the backdrop of an increasingly difficult external environment as two major elections in 2015 brought a new government to the helm, major constitutional changes (trimming the power of the presidency) and a reorganization of ministerial agency portfolios.
At the same time surging imports, falling exports, slowing remittances, tepid foreign direct investment, and a steady outward march of capital from government securities markets gave rise to macroeconomic imbalances.
According to the IMF, the government's strategy to address short-term imbalances and medium-term challenges rests on six pillars: Fiscal consolidation, Revenue mobilization, Public financial management, State enterprise reform, Enhancing monetary policy, and Trade and investment facilitation.
Capacity development will be a key element in ensuring a successful reform program, the IMF says. Technical assistance from the IMF will focus on tax policy, revenue administration, public financial management, foreign exchange, capital market, and financial sector oversight, as well as government financial and economic statistics.
The global lender recognizes that Sri Lanka's economic potential is considerable. The country has a strong base of human capital and reliable infrastructure. It also occupies a strategic position in Asia, the fastest growing region in the world, and investments over the last decade (particularly in ports and other transport-related facilities) can take advantage of this opportunity.
The IMF envisions a new economic landscape for Sri Lanka at the end of the medium-term program.
The agency expects a fiscal deficit of 3.5 percent of GDP by 2020 - sustained or lowered over the longer term to ensure the debt-to-GDP ratio continues to fall, an increase in the tax-to-GDP ratio from 10.1 percent in 2014 to about 15 percent by 2020, a reduction in public debt to about 68 percent of GDP by 2020 and an increase in foreign exchange reserves of the Central Bank to about 5 months of import cover by the end of the medium-term.
Further the IMF's assistance is expected to serve as a catalyst to mobilize additional support from other bilateral and multilateral institutions.
Sri Lanka expects some $650 million in new development and policy loans from such institutions as the World Bank, the Asian Development Bank, the Japan International Cooperation Agency, and others over the next three years, along with a steady pipeline of technical assistance in key reform areas.