An extensive discussion took place at the Government Information Department auditorium recently in which media chiefs were briefed about the International Monetary Fund’s (IMF) extended credit facility. The views of Minister of Highways, Transport and Mass Media, Dr. Bandula Gunawardana, Senior Economic Adviser to the President, Dr. R.H.S. Samaratunga and the Assistant Governor of the Central Bank of Sri Lanka Dr. Chandranath Amaraseka are published here.
In 2022, a severe collapse of the economy took place. The economy contracted by 7.3 percent. Sri Lanka’s highest inflation rate of 69.8 percent was recorded in September 2022. The Sri Lankan Rupee depreciated by 45 percent. This did not happen overnight.
After the crisis, the Government and the Central Bank of Sri Lanka implemented major economic stabilization policies. Negotiations with the International Monetary Fund (IMF) to obtain financial facilities began and debt restructuring was initiated and foreign debt payments were temporarily suspended. By April 2022 policy interest rates increased by seven percent after allowing exchange rate flexibility. The policy interest rates were increased by another two percent in the same year. At the same time, steps were taken to maintain the stability of financial institutions. Important steps were taken to increase the tax revenue. Non-essential recurrent spending cuts, hiring freezes, import restrictions, and state-owned commercial enterprise reforms were initiated.
The year 2023 reported a positive value in the last two quarters. But due to the high negative value recorded in the first two quarters of 2023, the full year of 2023 recorded a contraction of 2.3 percent. But this year we expect an economic growth of 2.3 percent. Sri Lanka’s inflation has decreased to 0.9 percent. The resilience of the foreign remittances sector has improved. The stability of the financial system continues. Fiscal consolidation has been strengthened. Debt restructuring process has also been enhanced. The Extended Fund Facility (EFF) of the IMF is operational. Despite these reforms, the public is still suffering.
April 2022 gross official reserves were very low but they have now increased to US$ 5.5 billion. The CBSL had to increase interest rates. But those interest rates are being lowered. To encourage that borrowing, the Government’s income in 2020-22 was reduced to eight percent. It has so far been able to increase the income up to 11 percent with the facility of the IMF.
According to the data of 196 countries, there were 60 countries where there was 50 percent inflation between 1980-2023. There have been 72 instances where inflation was over 50 percent in those countries. Out of these 72 cases, inflation has been reduced to 10 percent only in 12 cases. Although we have been able to reduce inflation, there are countries where high inflation has existed for more than 35 years.
The IMF’s Extended Credit Facility is based on five pillars. The stability that was the goal of the IMF and the Sri Lankan authorities is happening. Going forward, the authorities will pay more attention to economic growth. In order to create stability, the poor and the vulnerable may be affected, so attention should be paid to protecting them.
Many structural reforms are underway. They are what we should be doing even without the IMF. The new Central Bank Act has no room to mint money for the Government’s Budget Deficit. Parliamentary approval was received for banking law amendments. The Anti-Corruption Act (ACA) was approved by Parliament. Laws for public finance and debt management are currently being introduced. We expect economic growth to be around three percent this year.
With import easing, last year’s trade deficit was -5.8 percent. A value of -7.8 is expected this year. Gross official reserves are expected to increase. The Government’s primary balance recorded a positive figure after many years. It is hoped that the Budget Deficit will decrease. It is expected that the loans given to the private sector will grow up to 8.5 percent. Inflation is expected to be maintained below five percent. There are many risks to these forecasts and the macroeconomic outlook. Global monetary policy, energy and commodity price volatility, geopolitical developments, China and India factors affect it.
It is unimaginable what could happen if the current reforms are abandoned or changed. Economic growth should be accelerated without harming economic stability. Third, monetary and fiscal stimulus cannot be used to increase economic growth. Therefore, economic growth should be brought about by governance reforms and reforms to increase productivity and efficiency. Finally, it is essential to maintain debt sustainability and agreements with the IMF, the world’s lender of last resort.
Compiled by Subhashini Jayaratne, translated by Jonathan Frank
