Sri Lanka has to improve budgets, keep flexible exchange rate: IMF rep
ECONOMYNEXT – Sri Lanka has to keep on a path of reducing budget deficits, broaden revenues keep the exchange rate flexible to conserve forex reserves and move towards inflation targeting, an International Monetary Fund official said.
"If Sri Lanka continues on the path of fiscal consolidation, and maintains consistency and persistently the reforms of the last couple of years, investor confidence could strengthen and they could actually remain with Sri Lanka," said Eteri Kvintradze, IMF Resident Representative in Colombo told the Sri Lanka Economic Summit Thursday.
Global economic uncertainty has intensified in 2018. The US Fed raising interest rates and a looming trade war with China have resulted in capital outflows and weakening currencies across emerging markets. Rising oil prices are making matters worse.
Sri Lanka has high debt and low tax revenues which have made previous episodes of global downturns difficult to navigate.
"Sri Lanka is vulnerable because of its current account deficit, low US dollar reserves position and high debt rollover requirements," Kvintradze said.
"In order to manage these vulnerabilities Sri Lanka needs to maintain and strengthen the reserves it needs to deal with external shocks. There has to be exchange rate flexibility. In this context, developing a comprehensive inflation targeting framework is essential," she said.
Sri Lanka is in a 1.5 billion US dollar Extended Fund Facility (EFF) Programme with the IMF since 2016 of which 1 billion US dollars has already been approved.
This is the island’s 17th IMF programme since 1965, but whereas other previous programmes were short term lasting 18 months, the EFF is a three-year programme which aims to introduce long term reforms.
"Sri Lanka has been performing relatively well and at this moment the fifth review is being conducted with one more remaining," Kvintradze said.
"Many reforms are underway for a more stable and broader tax system to enable future revenue capacity. Reforms to the Inland Revenue Department are essential and now the focus is about implementation and automating systems".
Managing state-owned enterprises was also a critical requirement to contain fiscal pressures.
"Energy pricing reforms is a key parameter and a necessary step to contain fiscal costs on SEOs, but this is not enough. More needs to be done to address the cost efficiencies of SOEs," Kvintradze said. (COLOMBO, 13 September 2018)