On June 1, the IMF Executive Board completed the fourth review of Sri Lanka’s economic performance under the program supported by a three-year Extended Arrangement under the Extended Fund Facility (EFF) arrangement. Completion of this review enables the disbursement of the equivalent of SDR 177.774 million (about US$ 252 million), bringing total disbursements under the arrangement to the equivalent of SDR 715.23 million (about US$ 1,014 million).
Sri Lanka’s three-year extended arrangement was approved on June 3, 2016, in the amount of about SDR 1.1 billion (about US$1.5 billion, or 185 percent of quota in the IMF at that time of approval of the arrangement). The Executive Board also concluded the 2018 Article IV consultation with Sri Lanka today.
Following the Executive Board’s discussion of the review, Mr. Mitsuhiro Furusawa, Acting Chair and Deputy Managing Director, said: “Sri Lanka has made important progress under its Fund-supported program. The authorities’ efforts to improve the policy mix through fiscal consolidation, prudent monetary policy, and landmark structural reforms are supporting the economic recovery, despite recent shocks. 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.
“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. Going forward, a robust fiscal rule and medium-term debt management strategy will help place debt firmly on downward path.
“The recent approval of an automatic fuel pricing formula is a major achievement towards reducing fiscal risks from state-owned enterprises (SOEs). 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. Efforts to build up international reserves should be sustained, with exchange rate flexibility as the first line of defense in response to volatile global capital flows. 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.