IMF says Sri Lanka rate hike desirable, energy pricing reforms urgent
ECONOMYNEXT – The International Monetary Fund (IMF) has approved US$167.2 million under its program, saying Sri Lanka’s performance was satisfactory but noting that another interest hike might be necessary to rein in inflation and credit growth.
The IMF also called for progress in structural reforms, including tax administration and energy pricing, after the IMF Executive Board’s second review of Sri Lanka’s $1.45 billion Extended Fund Facility (EFF) arrangement.
“Sri Lanka’s performance under the Fund-supported program has been broadly satisfactory,” Mitsuhiro Furusawa, Acting Chair and Deputy Managing Director, said in a statement.
“Macroeconomic and financial conditions have been stable, despite severe weather events and global market volatility.
“The authorities launched fundamental income tax reform, undertook meaningful corrective actions to achieve program targets on international reserves, and remain committed to the reform program. Going forward, the reform momentum should strengthen further with greater ownership, building on the progress made so far.”
Furusawa said fiscal performance has been strong with targets for the fiscal balance and tax revenue having been met.
The new Inland Revenue Act, which has been submitted to parliament, will support fiscal consolidation, make the tax system more efficient and equitable, and generate resources for social and development programs, he said.
“Nevertheless, Sri Lanka’s high debt burden and gross financing needs require further revenue-based consolidation,” Furusawa said. “Timely progress in structural reforms, including tax administration and energy pricing, will strengthen the platform for durable consolidation.
“Inflation and credit growth remain on the high side,” he also said. “While monetary policy was tightened in March, further tightening is desirable until clear signs emerge that inflation pressures and credit expansion have subsided.
“While financial soundness indicators remain stable, banks’ capital adequacy ratio has declined due to rapid credit growth. Financial sector supervision should be strengthened, and macro-prudential measures could be deployed to rein in credit growth if needed.”
Furusawa said continued international reserves accumulation and enhanced exchange rate flexibility, to which the authorities are committed, would reduce Sri Lanka’s external vulnerabilities.
The IMF statement said the Executive Board granted a waiver of nonobservance of the continuous performance criterion on accumulation of external arrears which was missed due to continued difficulties of establishing a payment platform.
It also gave waivers of applicability of the performance criteria for end-June 2017 on floor of the central government primary balance and the program net official international reserves of the Central Bank of Sri Lanka, given unavailability of information necessary to assess observance.
(COLOMBO, July 18, 2017)