Press Release No. 15/154

Press Release: IMF Staff Concludes Visit to Sri Lanka

March 4, 2015

A staff mission led by Todd Schneider visited Colombo during February 23 to March 4 to conduct Post-Program Monitoring discussions. This form of enhanced surveillance is routine practice for countries which have had “exceptional access” to IMF resources, as is the case for Sri Lanka, which successfully completed a $2.6 billion IMF program in 2012. The mission met with government and Central Bank officials, as well as civil society and private sector representatives. At the end of the visit, Mr. Schneider issued the following statement:

“Real GDP growth is estimated at 7.4 percent for 2014, and is likely to continue in the relatively robust range of 6-7 percent in 2015. Inflation is expected to remain in the low single digits, although some upward pressure may emerge as higher wages and salaries translate into increased demand. The external current account improved in 2014, and will likely strengthen further in 2015 given lower oil prices and further growth in exports, services trade, and inward remittances. The mission agreed with the authorities that prospects remain favorable and that sustaining robust growth over the medium-term will require continued commitment to policies in support of macroeconomic stability, and structural reforms to enhance productivity and competitiveness.

“We welcome the government’s commitment to good governance, increased transparency, and financial discipline. The mission and the authorities agreed that medium-term fiscal consolidation should remain a linchpin in macroeconomic policy—ensuring a durable reduction in Sri Lanka’s public debt. However, the mission highlighted a number of concerns with respect to the Interim Budget. In the mission’s assessment, achieving a deficit of 4.4 percent of GDP will be challenging, and the authorities should consider contingency measures should revenues fail to materialize as projected. Further, one-off tax measures introduced to finance the Interim Budget do not, in the mission’s view, constitute a step toward a more effective tax system. The mission and the authorities agreed on the need for more comprehensive reforms to streamline the tax system, and reduce or eliminate exemptions to put revenues on a steady upward path. Forthcoming technical assistance from the IMF will focus on these areas.

“A succession of steps to ease monetary policy over 2013-14 helped facilitate a recovery of private sector credit late in 2014 and into early 2015. The current stance of monetary policy appears appropriate, but the central bank should monitor credit, inflation, and liquidity developments closely in coming months. The mission noted the decline in central bank foreign exchange reserves over the last six months. We highlighted the need to preserve Sri Lanka’s cushion of foreign exchange reserves and in this context emphasized the need for exchange rate flexibility. Intervention should be limited to dealing with excessive short-term volatility. The exchange rate does not appear out of line with fundamentals, particularly given the projected improvement in the balance of payments.

“A discussion on Post Program Monitoring by the IMF’s Executive Board is expected in late April.”