Commendable progress in implementing difficult reforms – IMF
Gross international reserves increase by US$ 1.5 billion:
Shortage of essentials have eased:
Economy showing tentative signs of stabilisation :
New Central Bank Act, Anti-Corruption Act could improve governance if implemented effectively:
Inflation down from a peak of 70% in September 2022 to below 2% in September 2023:
Steady progress on structural reforms:
The International Monetary Fund (IMF) representatives arrived in Sri Lanka to discuss economic and financial policies to support the approval of the First Review of the programme under the Extended Fund Facility (EFF) arrangement, said that Sri Lanka has made commendable progress in implementing difficult but much-needed reforms. Addressing the media after concluding their mission in Colombo at the Central Bank of Sri Lanka (CBSL) Senior Mission Chief of IMF for Sri Lanka Peter Breuer yesterday said that the people of Sri Lanka have shown remarkable resilience in the face of enormous challenges.
“Sri Lanka has made commendable progress in implementing difficult but much-needed reforms.
These efforts are bearing fruit as the economy is showing tentative signs of stabilization. Inflation is down from a peak of 70 percent in September 2022 to below 2 percent in September 2023, gross international reserves increased by $1.5 billion during March-June this year, and shortages of essentials have eased. Despite early signs of stabilization, full economic recovery is not yet assured.
Growth momentum remains subdued, with real GDP in the second quarter contracting by 3.1 percent on a year-on-year basis and high-frequency economic indicators continuing to provide mixed signals. Reserve accumulation has slowed in recent months,” Breuer said.
He added that the IMF team had constructive and productive discussions with the Sri Lankan authorities on economic performance and policies underpinning the first review under the IMF Extended Fund Facility (EFF) arrangement. The people of Sri Lanka have shown remarkable resilience whilst the authorities have made significant progress on important reforms. Discussions will continue towards reaching a staff-level agreement in the near term that will maintain the reform momentum needed to allow Sri Lanka to emerge from its deep economic crisis.
An IMF mission team led by Peter Breuer and Katsiaryna Svirydzenka visited Colombo from September 14 to 27, 2023 to discuss economic and financial policies to support the approval of the First Review of the programme under the EFF arrangement. The objectives of the IMF- supported programme will continue to focus on restoring macroeconomic stability and debt sustainability, while protecting the poor and vulnerable, safeguarding financial stability, and stepping up structural reforms to address corruption vulnerabilities and unlock Sri Lanka’s growth potential.
At the end of the mission, Breuer and Svirydzenka issued the following statement: “Sustaining the reform momentum is critical to put the economy on a path towards lasting recovery and stable and inclusive economic growth. The authorities have met the program’s primary balance targets and remain committed to this important pillar of the program so as to support their efforts to restore debt sustainability.
However, revenue mobilization gains–while improved relative to last year–are expected to fall short of initial projections by nearly 15 percent by year end, in part due to economic factors. The onus of fiscal adjustment would fall on public expenditure if there were no efforts to recoup this shortfall. This could weaken the government’s ability to provide essential public services; and undermine the path to debt sustainability. To increase revenues and signal better governance, it is important to strengthen tax administration, remove tax exemptions, and actively eliminate tax evasion,” Breuer said.
Against continued uncertainty, it also remains important to rebuild external buffers by strong reserves accumulation. Building on the Central Bank of Sri Lanka’s success in controlling inflation, refraining from monetary financing will help keep inflation in check.
Other challenges include maintaining cost recovery of electricity pricing. The government has made steady progress on structural reforms. Key legislations passed in Parliament, including the new Central Bank Act and the Anti-Corruption Act, could improve governance if implemented effectively. The IMF Governance Diagnostic report would inform future reform measures to strengthen governance when published. A new welfare benefit payment scheme was enacted with new eligibility criteria that aims to improve targeting, adequacy, and coverage of social safety nets. To ensure financial stability, steps were taken on conducting bank diagnostics, developing a roadmap for addressing banking system capital and liquidity shortfalls, and improving the bank resolution framework, he added.
“The authorities have also made headway on regaining debt sustainability through the execution of the domestic debt restructuring and advancing discussions with external creditors. As Sri Lanka is restructuring its public debt which is in arrears, Executive Board approval of the first programme review requires the completion of financing assurance reviews. These financing assurance reviews will focus on whether adequate progress has been made with debt restructuring to give confidence that it will be concluded in a timely manner and in line with the programme’s debt targets, Svirydzenka said.
She further said that discussions are on-going, and the authorities are continuing to make progress on their plans for revenue mobilization targets, anti-corruption efforts, and other important structural reforms.“The IMF team will continue its discussions in the context of the First Review with the goal of reaching a staff-level agreement in the near term. We reaffirm our commitment to support Sri Lanka at this difficult time,” Breuer added.
When Breuer was asked whether the country needs any tax reforms, he said that it is needed to implement a tax reform to increase the state revenue. He mentioned that it has been discovered that there is a certain revenue shortfall in one area in which they are looking to try and find ways to address that shortfall and compensate for it.
Working in the direction of having an agreement on these policies is one of the most important prerequisites.Breuer further stated that there is no fixed timeline for the disbursement of the second tranche of the IMF’s EFF to Sri Lanka.
But however two important things are needed to be satisfied for the matter to be fulfilled. “There’s no fixed timeline for EFF but we need two important things to be satisfied. We need to reach an agreement on a set of policies and reforms that will allow us to go forward with the understanding that the objectives of the program can be reached”, he added.
The IMF team held meetings with President and Finance Minister Ranil Wickremesinghe, CBSL Governor Dr.Nandalal Weerasinghe, Finance State Minister Shehan Semasinghe, Chief of Staff to the President Sagala Ratnayaka, Secretary to the Treasury Mahinda Siriwardana, and other senior government and CBSL officials. The IMF team also met with MPs, representatives from the private sector, civil society organizations, and development partners.
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