The International Monetary Fund (IMF) says Sri Lanka needs to implement a credible and coherent strategy covering both the near- and medium-term to restore macroeconomic stability and debt sustainability.
In its Staff Report for the 2021 Article IV Consultation with Sri Lanka, the IMF recommended a comprehensive set of policies with specific measures.
The IMF noted that reforms should focus on strengthening VAT and income taxes through rate increases and base-broadening measures.
Fiscal adjustment should be accompanied by energy pricing reforms to reduce fiscal risks from loss-making public enterprises, the IMF said further, adding that institutions building reforms, such as revamping the fiscal rule, would help ensure credibility of the strategy.
The IMF also suggested that near-term monetary policy tightening is needed to ensure that the recent breach of the inflation target band is only temporary. Recent welcome steps to gradually unwind the Central Bank’s large treasury bill holdings should continue through close coordination with the Ministry of Finance.
It also recommended the gradual restoration of a market-determined and flexible exchange rate. “To avoid disorderly movements in the exchange rate, the transition should be carefully sequenced and implemented as part of a comprehensive macroeconomic adjustment package.”
Social safety nets should be strengthened, by increasing spending, widening coverage, and improving targeting, to mitigate the adverse impacts of macroeconomic adjustment on vulnerable groups, the IMF said further.
In a one page statement the Central Bank (CBSL) has clarified its stance on the International Monetary Fund’s 95 page Article IV Staff Report on Sri Lanka.
“With the Government indicating that it is seeking a closer engagement with the IMF, the CBSL stands ready to cooperate in such an engagement,” the statement read.
It also noted that some of the recommendations made by the IMF have already been implemented by the Finance Ministry and the Central Bank.
These include monetary policy tightening since August 2021, allowing exchange rate flexibility, removing restrictions on foreign exchange market transactions, implementing envisaged revenue-enhancing measures, and allowing market-based price adjustments to key commodities.
The Central Bank said it has tightened the monetary policy since August 2021, allowed exchange rate flexibility, removed restrictions on foreign exchange transactions, implemented envisaged revenue-enhancing measures, and allowed market-based price adjustments to key commodities.
The Central Bank also stated that it has continued to publish its analysis, in addition to providing further in-depth analysis on policy matters to the government and engaging in a continued close dialogue with the government on the same.
