IMF approves US$252mn in Sri Lanka program, backs fiscal rules

ECONOMYNEXT – The International Monetary Fund has approved the disbursement of a 252 million US dollar tranche under its program and asked for continued reforms to boost growth as the country recovers from a balance of payments crisis.

The IMF said Sri Lanka was making gains in improving state finances and monetary policy, and structural reforms would boost growth.

"Sustaining the reform momentum is critical to strengthen the country’s resilience to shocks, given the still sizable public debt and low external buffers, and to set the foundation for strong and inclusive growth," Deputy Managing Director Mitsuhiro Furusawa, said in a statement.

"Further progress with revenue-based fiscal consolidation, supported by the new Inland Revenue Act, is needed to help safeguard important social and infrastructure spending, including in response to natural disasters."

IMF’s board has completed the fourth review under a 1.5 billion US dollar (1.1 billion Special Drawing Rights) Extended Fund Facility arrangement. With the latest tranche 1.014 million US dollars (715.23 million SDR) had been disbursed.

Sri Lanka’s economic growth fell to 3.1 percent in 2017, amid a drought and foreign reserve collections after a the central bank generated a balance of payments crisis in 2015 by printing money to resist an interest rate rise amid strong private credit recovery coupled with a widening budget deficit.
The economy was also hit by a drought which had since ended.

Analysts say it is normal for growth to slow after an inflation bout from a currency collapse when people and companies comes to terms with higher price structure with trade goods up and real salaries depleted.

Sri Lanka has been devising rules on deficit spending which would help keep the economy stable in the long term.

A "robust fiscal rule" and better management of debt will also help the country, the IMF also said.

The IMF praised the starting of a fuel pricing formula which had been a trigger of economic instability in the past where money was printed to keep fuel prices low, triggering balance of payments trouble.





"The recent approval of an automatic fuel pricing formula is a major achievement towards reducing fiscal risks from state-owned enterprises (SOEs)," Furusawa said.

"In this regard, it is essential for the authorities to implement an automatic pricing formula for electricity and a restructuring plan for Sri Lankan Airlines, as well as further strengthening SOE governance and transparency.

"The impact of the reforms on the vulnerable can be mitigated by ongoing efforts to strengthen social safety nets.

"The Central Bank of Sri Lanka should continue to manage monetary policy prudently, in the face of price shocks and market volatility."

Sri Lanka should continue to build foreign reserves and allow the exchange rate to move if there are global capital movements, the IMF said.

Sri Lanka’s rupee came under pressure after the central bank printed tens of billions of rupees in March by terminating term repo deals and in April through outright purchases of Treasury bills and term reverse repo auctions.

Sri Lanka is now planning to move into a modified inflation targeting framework, after years of calls from analysts for reform, which is being supported by the IMF.

"Upgrading the central bank law will be instrumental for the new inflation targeting framework. While financial soundness indicators remain stable, continued credit growth in the real estate sector warrants close monitoring.

“The authorities should step up implementation of structural reforms, with a focus on fostering gradual trade liberalization and the investment climate, developing a natural disaster risk financing framework, and promoting gender equality in the labor market together with well-targeted social safety nets." Colombo/June02/2018)

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