Mar 09, Colombo: Following a series of weather-related shocks in 2017, Sri Lanka's economy is gradually normalizing with a projected Real GDP growth of 4.4 percent in 2018 but the authorities should push ahead with the reforms in their Vision 2025 to maintain robust growth, the International Monetary Fund (IMF) said today.
In a concluding statement issued today on the 2018 Article IV Mission with Sri Lanka, the IMF discussing the progress of Sri Lanka's Economic Reform Program said the reforms under the authorities' Vision 2025 are important in promoting rapid and inclusive growth.
An IMF staff team led by Manuela Goretti visited Colombo from February 27 - March 9 to hold discussions for the 2018 Article IV consultation and advance the technical work on the fourth review of Sri Lankan authorities' economic reform program under the three-year Extended Fund Facility (EFF).
The IMF said its mission had constructive discussions with the Sri Lankan authorities on the 2018 Article IV Consultation and made progress towards a staff-level agreement on the fourth review of the EFF-supported program. Program discussions will continue in April in Washington D.C. during the Spring Meetings of the IMF and the World Bank.
The mission met with Prime Minister Wickremesinghe, State Minister of Finance Wickramaratne, State Minister of National Policies and Economic Affairs Dr. Harsha De Silva, Governor of the Central Bank of Sri Lanka (CBSL) Dr. Indrajit Coomaraswamy, other public officials, and representatives of the business community, civil society and international partners.
Following is the full report of the IMF staff mission:
Economic Recovery Set to Continue
Following a series of weather-related shocks in 2017, the economy is
gradually normalizing. Real GDP growth is projected to rise to 4.4 percent
in 2018, supported by a recovery in agriculture and industry and robust
growth in services, reaching 5 percent over the medium term. Inflation is
projected to revert to around 5 percent by end-2018, as food prices
Reforms have progressed under the program but vulnerabilities remain
Despite weather-related shocks and some delays in implementation, program
performance remains broadly on track. The new Inland Revenue Act (IRA) and
the CBSL’s Roadmap towards inflation targeting represent landmark reforms
and their successful implementation is critical going forward. Fiscal
consolidation is advancing, with preliminary data showing a primary surplus
in 2017. The CBSL has been effective in curbing credit growth and
stabilizing inflation despite recent pressures, while stepping up its pace
of reserve accumulation.
Nevertheless, the economy remains vulnerable to adverse shocks given the
still sizable public debt and low external buffers. Looking ahead, to
secure these hard-won gains and support inclusive, sustained growth, the
reform momentum needs to continue and policy frameworks and institutions
Strengthening institutions to promote stability and inclusive growth
Against this backdrop, the authorities should push ahead with their Vision 2025 strategy to support Sri Lanka’s rapid and inclusive
growth through ambitious structural, macro-economic, and social reforms.
Key priorities include: (i) advancing fiscal consolidation through revenue
mobilization, a more robust fiscal rule, and stronger SOE governance, (ii)
modernizing monetary, financial and exchange rate policy frameworks, and
(iii) accelerating growth-enhancing structural reforms.
Advancing fiscal consolidation through stronger fiscal rules and SOE
Progress in revenue-based fiscal consolidation has helped preserve space
for public investment and social spending while bringing down public debt.
Further revenue mobilization is needed to meet the 2018 primary surplus
target and reduce the overall deficit to 3.5 percent of GDP by 2020. The
new IRA represents a major achievement towards a simpler and more equitable
tax system, and its smooth implementation will be critical. There is also
scope to further strengthen efficiency of public investment and social
Beyond 2020, a well-designed fiscal rule can help build on this progress
and place debt firmly on a downward path. In line with international best
practices, the Fiscal Management Responsibility Act should be amended to
contain mechanisms to ensure compliance, supported by improvements in debt
management and greater fiscal transparency.
Energy pricing reforms are a priority to contain fiscal risks from State
Owned Enterprises (SOEs). Targeted social transfer programs can help to
mitigate the distributional impact of these reforms. Timely publication of
the audited financial statements of major SOEs and regular review of
performance under the recently introduced Statements of Corporate Intent
would also strengthen SOEs governance and transparency.
Modernizing monetary, financial, and exchange rate policy frameworks
The CBSL has prudently managed monetary policy in the face of price shocks
and market volatility. The CBSL should remain focused on price stability as
its primary objective and stand ready to tighten if signs of demand-side
inflation pressures or accelerating credit growth appear. The favorable
external environment offers a window of opportunity to bolster reserve
buffers and, in the event of volatile global capital flows, exchange rate
flexibility should be the first line of defense. Planned changes to the
Monetary Law Act, as part of the Roadmap towards flexible inflation
targeting, are a key milestone to further strengthen the CBSL’s mandate,
governance, and autonomy.
The authorities should remain vigilant against a buildup of systemic risks
in the financial sector. If needed, further macroprudential tools can be
considered to curb excessive credit growth in certain sectors. The banking
sector is on track to meet the Basel III requirements and should prepare
contingency plans to insure against an adverse shock. Non-bank financial
institutions should be subject to the same level of oversight as banks,
with problem institutions promptly resolved.
Accelerating structural reforms to promote inclusive growth
The reforms under the authorities’ Vision 2025 are important in
promoting rapid and inclusive growth. Sri Lanka’s protectionist trade
regime should be gradually liberalized through reform of tariffs,
para-tariffs, and non-tariff barriers, as well as closer regional
integration. Robust implementation of the new IRA and the one-stop shop for
FDI will improve the investment climate. Efforts to combat corruption
should be stepped up, including through greater transparency in fiscal and
SOE management and a stronger AML/CFT regime.
Addressing Sri Lanka’s sizable gender gap and boosting female labor force
participation will require labor market reforms and effective gender
budgeting, including through vocational training, flexible work
arrangements, safe transportation, and child care support. A well-designed
natural disaster risk financing framework will help Sri Lanka address costs
associated with climate change.