The IMF concluded its third review of the Extended Fund Facility on March 28 with the release of US$ 334 million as the fourth tranche of the US$ 2.9 billion due to be disbursed within the 48- month period.
In its review report and at the media conference held by the IMF team, a number of messages were passed to the public and policy makers on Sri Lanka’s present economic status and future challenges.
In particular, the IMF gently hinted at some of its concerns on recent mis-alignments and emphasised the need for a quick fix.
This article aims at discussing some of the key takeaways of the review report as well as highlight some of the key messages which were mentioned during the media briefing.
Positive, yet vulnerable
The staff report submitted to the Executive Board of the IMF clearly applauded the positive outcomes achieved so far during the program period. In particular, the report highlighted output expansion, after recording contraction of output for six consecutive quarters, starting from the third quarter of 2023 and reaching over 5 percent by the end of 2024. It was mentioned that, during the crisis, Sri Lanka lost around 10 percent of its output and over 40 percent of it has already been recovered.
Sri Lanka’s achievements in the areas of inflation, interest rate, external reserves, and revenue mobilisation were commended. It was mentioned that these achievements were made possible due to bold policy reforms undertaken during the first two-year of the program. Nevertheless, the report highlights the presence of a sizable risks emanating from internal and external uncertainties and policy reversals.
Stay in the reform process
The IMF report stressed the need for continuing with policy reforms while calling general public and trade union to exercise greater patience. Going forward, people will be able to witness an increase in income and income generating opportunities thereby easing some of the existing uneasiness.
In particular, the report emphasised the need for expending private credit and foreign direct investment since the public sector is not in a position to expend its investments given the limited fiscal space. In line with the Economic Transformation Bill, the IMF reports outlined the importance of attracting FDI, enhancing productivity, and promoting female labour force participation for unlocking long-term growth potential in the economy. These positive outcomes are only possible if Sri Lanka continues with the policy reforms covering international trade, investment, labour market, and other areas. In particular, the report as well as the IMF team stressed the need for improving financial management and overall efficiency of the State Owned Enterprises (SOEs) and clearly stated that SOEs should not be a burden on tax payers in the future.
Fiscal consolidation via revenue mobilisation
The staff report highlighted that Sri Lanka has been able to achieve remarkable progress in enhancing public revenue targets during last two years due to number of bold initiatives taken regardless of the short-term painful outcomes.
According to the IMF, various ad-hoc tax concessions and exemptions had a sizable revenue loss in the past. It was highlighted that Sri Lanka must enhance revenue administration with required reforms so as to make sure revenue targets are achieved. It was pointed out that the cost reflective pricing strategy should be applied effectively to avoid SOEs losses.
The IMF team, during the press briefing, highlighted that electricity tariffs should follow the above principle to avoid being dependent on the public coffer. Among the other factors, the IMF cautioned the policy makers on public investment expansion on the ground of limited fiscal space and stressed the need for private investment. The IMF program required the Government to spend 0.6-0.7 percent of GDP for protecting vulnerable. However, it was argued that such program should be well targeted and monitored to assure that most required receive the benefits.
Maintaining independent institutions
The IMF highlighted the role played by the Central Bank of Sri Lanka in conducting prudent monetary policy and other measures in achieving price stability and financial stability in the economy. It stressed the importance of independent Central Bank in maintaining conducive macroeconomic stability. The report highlighted the measures taken in preventing bribes and corruption thereby addressing key governance issues. Nevertheless, further reforms are needed, as it highlighted, in arresting bribes and corruption taking culture which has been embedded within the key government institutions.
The IMF third review stated that Sri Lanka has achieved remarkable progress though the economy continues to face some vulnerabilities. The reform process has begun delivering the expected results in the economy. Going forward,Sri Lanka needs to avoid any policy reversal and/or discontinuity. Fiscal discipline and further reforms are essential in unlocking Sri Lanka’s long-term growth potential. Learning from the crisis the country needs to build both internal and external buffers to face risks arising from man-made or natural disasters. Recent developments in the global economy may pose some challenges to developing countries such as Sri Lanka and it is paramount important that the country carefully navigates this trouble water by adopting appropriate policy measures.
