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IMF cautions SL over new policies

The International Monetary Fund (IMF) has cautioned Sri Lanka over its new policies and urged the Government to take measures to improve efficiency in the public administration and strengthen revenue mobilisation to help reduce the high public debt, while preserving space for critical social and investment needs.

A staff team from the IMF led by Manuela Goretti visited Colombo from 29 January to 7 February to meet with the new administration and discuss its policy agenda.

In a statement yesterday (8), the IMF said that caps on lending rates and the loan repayment moratorium for small and medium-sized enterprises (SMEs) should be temporary in order to avoid unintended distortions and inefficiencies in financial intermediation.

The IMF also said that modernising the Banking Act, with a view to strengthening and harmonising regulation, supervision, and resolution frameworks for deposit-taking financial institutions, would help safeguard financial stability.

“Under current policies, as discussed with the authorities during the visit, the primary deficit could widen further to 1.9% of GDP in 2020, due to newly implemented tax cuts and exemptions, clearance of domestic arrears, and backloaded capital spending from 2019. Given risks to debt sustainability and large refinancing needs over the medium term, renewed efforts to advance fiscal consolidation will be essential for macroeconomic stability. Measures to improve efficiency in the public administration and strengthen revenue mobilisation can help reduce the high public debt, while preserving space for critical social and investment needs. Advancing relevant legislation to strengthen fiscal rules would anchor policy commitments, restore confidence, and safeguard sustainability over the medium term,” Goretti said.

She said that preliminary data found that Sri Lanka fell short of the primary surplus target in 2019 under the programme supported by the Extended Fund Facility (EFF).

The target was missed by a sizeable margin in 2019 with a recorded deficit of 0.3% of GDP, due to weak revenue performance and expenditure overruns.

Net International Reserves fell short of the end-December target under the EFF-supported programme in 2019 by about $ 100 million amid market pressures after the presidential election and announced tax cuts. However, conditions have since stabilised.

“The IMF staff team had constructive discussions with the Sri Lankan authorities on recent economic developments and the country’s economic reform agenda. Given the high level of public debt and refinancing needs in the country, ensuring macroeconomic stability calls for fiscal consolidation, prudent monetary policy, and sustained efforts to build international reserves. Ambitious structural and institutional reforms remain critical to raise the country’s growth potential and promote inclusiveness,” Goretti said.

The IMF found that the economy was gradually recovering from the terrorist attacks last April. Real GDP growth is estimated at 2.6% in 2019. The recovery is supported by a solid performance of the manufacturing sector and a rebound in tourism and related services in the second half of the year. High frequency indicators continue to improve and growth is projected to rebound to 3.7% in 2020, on the back of the recovery in tourism, and assuming that the novel coronavirus will have only limited negative effect on tourist arrivals and other economic activities. Inflation is projected to remain at around 4.5% , in line with the Central Bank of Sri Lanka target. After a sharp import contraction in 2019, the current account deficit is expected to widen to nearly 3% of GDP in 2020.