IMF warns of impending challenges against Sri Lanka’s reforms
Sri Lankan Government continues to face many challenges in implementing its ambitious economic reform agenda despite the International Monetary Fund’s (IMF) Extended Fund Facility (EFF), IMF officials warned.
Releasing the IMF first review under the EFF, they noted that the political challenge of tax reforms— VAT and income taxes—has been and will remain a policy risk for Sri Lanka.
Despite firm financing assurances from the World Bank, Asian Development Bank, and key bilateral donors that are in place for an additional sum of US$650 million during 2016–18, the balance of payment risks may necessitate further adjustment or additional financing, the IMF review report revealed.
Key risks to the government’s economic reforms are revenue slippage or failure to implement key revenue-related reforms; weaker than expected capital inflows or a reversal of capital flows lower than expected growth and/or new pressures on the trade account; and larger than expected losses at State owned Enterprises (SOE) and lack of progress in SOE reforms, the IMF report said.
The IMF assessment found that the Central Bank (CB) Monetary Law Act (MLA) falls short of international practices, especially in the areas of the bank’s autonomy and aspects of its governance arrangements (e.g., the government’s voting representation in the Monetary Board, absence of recapitalisation provisions, and inadequate limits on credit to government).
These issues are to be addressed in the near future with technical assistance from the IMF.
Legal reforms would also provide an opportunity to review the CB’s mandate in non-core operations (e.g., agent for public debt management and manager of the National Employees’ Provident Fund) that pose reputation risks to the bank.
The assessment also noted a need to clarify the treatment of foreign exchange swaps with domestic banks.
Given the large external liabilities and vulnerability to external debt pressure, the authorities should accumulate official international reserves mainly through direct purchases from the FX market, eschewing the reliance on foreign exchange swaps with commercial banks, the IMF has suggested.
Addressing the Sri Lankan media in Colombo via video conferencing from Washington last week, IMF Mission Chief, Jaewoo Lee said, “the government’s reform programme, supported by the IMF, aims to reduce the fiscal deficit, rebuild foreign exchange reserves, and introduce a simpler, more equitable tax system to restore macroeconomic stability and promote inclusive growth”.
He disclosed that economic growth will be 4.5 per cent and 4.8 per cent for 2016 and 2017 respectively and it is slightly below the over 5.0 per cent growth projected by the CB.
The new Inland Revenue Act scheduled for early next year should result in a more efficient, transparent, and broad-based tax system, he said adding that complementary structural reforms in tax administration, public financial management, and the governance.
The IMF has completed its first review of the EFF with Sri Lanka and approved $162.6 million disbursement bringing total disbursements under the arrangement so far to around $325.1 million. Sri Lanka’s three-year extended arrangement was approved on June 3, 2016 in an amount of $1.5 billion.