IMF Staff Concludes Visit to Sri Lanka to Discuss Progress of Economic Program

IMF News, September 23, 2016

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A staff team from the International Monetary Fund (IMF) led by Jaewoo Lee visited Colombo during September 13-23, 2016.
Purpose: to hold discussions on the first review of the Sri Lankan authorities’ economic program supported by a three-year Extended Fund Facility (EFF).
Statement reflects preliminary findings of the mission; staff will prepare a report that, subject to management approval, will be presented to the IMF's Executive Board for discussion and decision.

Overall performance reflected:
- improving balance of payments,
- reduced growth mainly related to recent floods,
- slightly higher inflation.
The mission welcomes:
- effective tightening of fiscal and monetary policies that contributed to improving market confidence and easing pressures on external balances.
All quantitative targets through end-June were met.

Forward-looking aspects of the program review, mainly related to the implementation of the tax reform package, need to be addressed without further delay.
Specific recommendations:
- Expedite the legislative process of implementing the value added tax (VAT) amendments needed to support revenue targets for 2016 and 2017.
- Ensure the 2017 budget is underpinned by a well-crafted and high-quality tax policy strategy to raise Sri Lanka’s low tax revenue-to-GDP ratio.
- Commence the legislative process for the new Inland Revenue Act to:
- rebalance the tax system toward a more predictable, efficient and equitable structure,
- generate needed resources in support of the country’s social and development objectives.

The mission welcomes the Central Bank of Sri Lanka’s (CBSL) move to preemptively raise policy rates to maintain inflation within its target band.
Recommendations for the CBSL:
- Remain vigilant in monitoring inflation pressures and stand ready to tighten further should inflation or credit growth continue to rise.
- Continue efforts to rebuild international reserves in light of easing external pressures.
- Maintain exchange rate flexibility to further develop the foreign exchange market.
- Consider plans for a transition to flexible inflation targeting as the monetary policy framework, possibly supported by IMF technical assistance.

Encourage concerted efforts to implement structural reforms in:
- public financial management,
- state owned enterprises,

building on substantial technical assistance received over the years.

Policy priorities to achieve medium-term macroeconomic objectives:
- Renewed effort toward greater integration into regional and global supply chains.
- Achieve higher levels of foreign direct investment (FDI).
- Enhance prospects for private sector investment.
- Bolster competitiveness to boost trade and private sector development and support growth potential.

The mission met with:
- His Excellency President Sirisena,
- Prime Minister Wickremesinghe,
- Finance Minister Karunanayake,
- Governor of the Central Bank of Sri Lanka Coomaraswamy,
- parliamentarians, other public officials, and representatives of the business community, civil society and international partners.
Discussions on reaching a staff level agreement on completion of the first review will continue in October in Washington D.C. during the Annual Meetings of the IMF and World Bank.

IMF Communications Department — Press Release No. 16/422, September 23, 2016