The Executive Board of the International Monetary Fund (IMF) has welcomed Sri Lanka’s recent favourable economic performance, including robust growth, low inflation, and a narrowing of the current account deficit and said it looks forward to the new Government’s comprehensive economic policy agenda.
In a report released Tuesday following the conclusion of the third Post-Program Monitoring (PPM) discussion with Sri Lanka on 29April, the IMF Executive Board said recent macroeconomic performance has generally been strong but risks appear to be on the rise.
Sri Lanka’s real GDP growth registered 7.4% in 2014 with headline and core inflation declining to 2.1 and 1.2%, respectively, by the end of the year.
The global lender noted that the outlook is broadly stable but set against heightened downside risks.
“While there is considerable growth momentum, downward pressure may emerge from such factors as lower public and private investment due to budget cuts and an uncertain policy environment, a crowding out of private sector credit, and the potential for negative spillovers from slower economic recovery in Europe – oneof Sri Lanka’s two most important export markets,” the IMF said in its report.
The IMF noted that the fiscal deficit is a key concern for 2015 and the medium-term. The 2015 deficit target will likely be very difficult to reach even with relatively optimistic assumptions regarding revenue gains, the lender cautioned.
While the external sector outlook for 2015 appears favourable due to expected drop in global fuel prices, there are several risks including an eventual reversion of the oil price shock and a slowdown in goods exports in the event growth in key export markets stalls, according to the IMF.
Directors of the Executive Board noted that fiscal risks and reduced external buffers pose challenges, underscoring the need for greater efforts to strengthen the policy framework and reduce vulnerabilities. Directors welcomed the authorities’ commitment to fiscal consolidation. However, they noted with concern that the deficit target under the revised 2015 budget relies to a large extent on one-off revenue measures.
Given the risks associated with the high public debt, Directors urged the authorities to adopt more ambitious measures to contain current expenditure while protecting priority social and high value-added infrastructure spending. They emphasised that a strengthening of the fiscal framework is needed to support consolidation and debt reduction.
Comprehensive tax policy and administration reforms, including tax expenditure reductions and simplification of the tax system to broaden the revenue base, will be crucial elements in a medium-term fiscal reform strategy.