The International Monetary Fund (IMF) says the Sri Lankan economy remains vulnerable to shocks, given high public debt, large refinancing needs, and low external buffers.
“Although domestic uncertainty remains elevated, the authorities are committed to strengthen the resilience of the economy through a strong policy mix, with prudent monetary policy, greater exchange rate flexibility, and revenue-based fiscal consolidation.”
“They are also advancing their structural reform agenda to secure the hard-won gains under the program and support strong and inclusive growth,” a Staff Report released on Thursday said.
The report was prepared by a staff team of the IMF for the Executive Board’s consideration on May 13, 2019, following discussions that ended on February 28, 2019, with the officials of Sri Lanka on economic developments and policies underpinning the IMF arrangement under the Extended Fund Facility.
The staff report said that amid external shocks and a weak domestic environment, program performance suffered important setbacks in 2018.
“Following the resolution of the political crisis by end-2018 and in the aftermath of the terrorist attacks of April 2019, the authorities remain committed to the program and are requesting an extension of the EFF arrangement by one additional year to allow more time to complete the reform agenda, recalibrating program targets and rephasing purchases.”
The report said a well-targeted 2019 budget was submitted to Parliament as a prior action for this review, while the CBSL resumed FX purchases to rebuild reserve buffers as a corrective action for the requested waiver on the reserve target.
The authorities also implemented five structural benchmarks for this review, despite the delays, it said.
The IMF staff report further said that the country’s economic recovery is expected to be gradual. “Real GDP growth is projected to recover to 3.6 percent in 2019 (compared to 4.5 percent at the time of the fourth review), driven by agriculture and manufacturing, and to gradually reach 5 percent over the medium term.”
Inflation is expected to rise to 4.5 percent by end-2019, as economic activity recovers and food prices stabilize, following weather-related supply disruptions in 2018.
The current account deficit is projected to narrow to 2.8 percent of GDP in 2019, driven by export growth, supported by the exchange rate correction and recently-signed free trade agreements, and lower oil prices, it said.
On May 13, 2019, the Executive Board of the International Monetary Fund (IMF) completed the Fifth Review of Sri Lanka’s economic performance under the program supported by an extended arrangement under the Extended Fund Facility (EFF).
Completion of this review, upon the granting of waivers of nonobservance for the end-December 2018 performance criteria on the primary balance and net official international reserves, makes available SDR 118.5 million (about US$ 164.1 million), bringing total disbursements under the arrangement to SDR 833.73 million (about US$ 1.155 billion).
The Executive Board also approved an extension of the arrangement by one additional year, until June 2, 2020, with rephasing of remaining disbursements.
