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* IMF commends Sri Lanka's new tax act, urges government to implement structural reforms to manage SOEs
Fri, Sep 29, 2017, 09:35 pm SL Time, ColomboPage News Desk, Sri Lanka.

Sept 29, Washington, DC: The International Monetary Fund (IMF) said a staff team of the global lender today concluded a visit to Sri Lanka to discuss the progress of the island nation's economic reform program.

An IMF staff team led by Jaewoo Lee visited Colombo during September 18-29, 2017 to hold discussions on the third review of Sri Lanka's economic program that is being supported by a three-year Extended Fund Facility (EFF).

Issuing a statement at the end of the visit, the IMF said the passage of the landmark Inland Revenue Act (IRA) is a major achievement which in turn will support the government's ambitious social and developmental program.

The mission commended the authorities for the strong efforts in implementing their IMF-supported economic reform program with all quantitative performance targets through end-June 2017 having been met and the landmark Inland Revenue Act (IRA) legislation passed by Parliament.

The IMF said fiscal consolidation based on stronger revenues remains essential for reducing high public debt and to remain on this path, further broadening of the tax base is needed to fund the social and development spending in the 2018 budget.

The mission suggested the government to focus on the smooth implementation of the IRA through supporting regulations and manuals, efficient tax administration, and greater awareness and preparedness of taxpayers through media outreach and information dissemination. Strengthening debt management capacity and developing a medium-term debt strategy would also enable effective management of the debt burden going forward.

The IMF said however, the progress has been mixed in implementing structural reforms-especially in relation to state owned enterprises (SOEs) and public financial management and an important priority for the government is to accelerate implementation of structural reforms in public financial management and SOEs.

"Large financial obligations of SOEs pose fiscal risks and need to be managed by enhancing oversight of performance indicators, developing SOE-specific reform strategies, and following through on fuel and electricity pricing reform," the mission statement said.

The mission also welcomed the broad-based strategy for improving trade and investment climate, which will help bolster competitiveness and boost private sector-led growth.

According to the IMF, overall, macroeconomic performance has been mixed. Growth has been subdued and inflationary pressures have increased reflecting the drought since late 2016 and the floods earlier this year. Growth is projected to remain below 4.5 percent for 2017, and to rebound next year as agricultural production normalizes and infrastructure projects pick up. The current account deficit is projected to widen somewhat this year due to higher imports of food and fuel related to the drought and floods. Capital inflows continue, supported by improving market confidence from the progress in reforms. As weather-related supply disruptions dissipate, headline inflation is expected to stabilize in the mid-single digits.

The IMF mission suggested the Central Bank of Sri Lanka (CBSL) to continue to remain vigilant in monitoring inflation pressures and stand ready to tighten monetary policy if needed to contain inflation or credit growth.

"The CBSL's drive towards gradually rebuilding reserves should continue. In this regard, the mission welcomes the CBSL's commitment to develop a roadmap for flexible inflation targeting and a flexible exchange rate regime, which will require strengthening the legal frameworks for CBSL's governance, improving market functionalities, and enhancing communication," it said.

The mission met with Prime Minister Ranil Wickremesinghe, Minister of Finance Mangala Samaraweera, State Minister of Finance Eran Wickramaratne, Governor of the Central Bank of Sri Lanka Dr. Indrajit Coomaraswamy, other public officials, and representatives of the business community, civil society and international partners.

Mission director Mr. Lee said the mission made significant progress toward reaching a staff-level agreement with the government on completing the third review of the EFF.

IMF's US$1.5 billion Extended Arrangement aims to support the Sri Lankan authorities' ambitious reform agenda to put public finances on a sustainable footing and create space for social and development program.

Further discussions will continue in October in Washington D.C. during the Annual Meetings of the IMF and the World Bank.


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