International Monetary Fund (IMF) mission, led by Mr. Peter Breuer and Ms. Katsiaryna Svirydzenka, has concluded a two-week visit to Colombo, where they discussed economic and financial policies aimed at supporting the approval of the First Review of the program under the EFF EFF (Extended Fund Facility) arrangement.
In a statement issued,The IMF team led by Mr. Breuer and Ms. Svirydzenka acknowledged the commendable progress made in implementing challenging reforms, which has started to yield positive results.
Inflation has dropped from a staggering 70 percent in September 2022 to below 2 percent in September 2023, and gross international reserves have increased by $1.5 billion during the first half of the year, while essential shortages have eased.
However, despite these encouraging signs of stabilization, the team emphasized that a full economic recovery remains uncertain. The second quarter of 2023 saw a 3.1 percent contraction in real GDP year-on-year, and high-frequency economic indicators continue to provide mixed signals. Furthermore, reserve accumulation has slowed in recent months.
The IMF team stressed the critical importance of sustaining the momentum of reforms to steer the economy towards lasting recovery and stable, inclusive economic growth. The government has met primary balance targets, but there are concerns that revenue mobilization gains may fall short of initial projections by nearly 15 percent by the year’s end.
To address this, the authorities must strengthen tax administration, remove tax exemptions, and actively combat tax evasion to increase revenues and signal better governance.
Additionally, refraining from monetary financing was highlighted as a measure to keep inflation in check, while maintaining cost recovery of electricity pricing remains a challenge.
Structural reforms were another focal point of the IMF mission’s discussions. Key legislations, such as the new Central Bank Act and the Anti-Corruption Act, have been passed in Parliament, with the potential to enhance governance if effectively implemented. The IMF Governance Diagnostic report will play a vital role in shaping future reform measures to strengthen governance once published.
The government has also enacted a new welfare benefit payment scheme with improved eligibility criteria, aiming to enhance the targeting, adequacy, and coverage of social safety nets. Furthermore, efforts are underway to ensure financial stability, including bank diagnostics, addressing banking system capital and liquidity shortfalls, and improving the bank resolution framework.
Regarding debt sustainability, the authorities have made significant progress through the execution of domestic debt restructuring and ongoing discussions with external creditors. However, as Sri Lanka is restructuring its public debt in arrears, the Executive Board’s approval of the first program review hinges on the completion of financing assurances reviews.
These reviews will assess whether sufficient progress has been made in debt restructuring to instill confidence that it will be concluded timely and in line with the program’s debt targets.
Throughout their visit, the IMF team held meetings with key figures, including President and Finance Minister Ranil Wickremesinghe, Central Bank of Sri Lanka Governor Dr. P. Nandalal Weerasinghe, State Minister Mr. Shehan Semasinghe, Chief of Staff to the President Mr. Sagala Ratnayaka, Secretary to the Treasury Mr. K M Mahinda Siriwardana, and other senior government and Central Bank officials. The team also engaged with Parliamentarians, representatives from the private sector, civil society organizations, and development partners.
Mr. Breuer and Ms. Svirydzenka expressed their gratitude to the Sri Lankan authorities for their excellent collaboration during the mission.
The IMF team will continue discussions in the context of the First Review, with the aim of reaching a staff-level agreement in the near term. They reaffirmed their commitment to supporting Sri Lanka during these challenging times.
