IMF: What happens now and after elections will be crucial for Sri Lanka

Sri Lanka is showing first signs of recovery as it finds itself in an election year, and therefore, what happens before the elections as well as after them will be crucial for the economic recovery in Sri Lanka, IMF’s Senior Mission Chief, Peter Breuer said on Friday.

He said so at a press briefing held at the conclusion of the IMF Staff Visit to Sri Lanka.

“This year is expected to be an election year. During our visit, we listened to political parties, their perspectives and angles of their economic policy perspectives. So, of course, what takes place in Sri Lanka in the run up to the elections and afterwards will have an impact on the country’s recovery and growth path and how it extricates itself from the ongoing crisis,” he said.

Breuer said that their strong expectation is Sri Lanka would reach a deal with its commercial creditors and bondholders by the next IMF review on Sri Lanka.

“It is our understanding that negotiations are ongoing and proposals are being exchanged,” he said.

However, he pointed out that Sri Lanka’s foreign debt restructuring is a complex procedure that takes time.

“There is also the China Development Bank which is considered as a commercial creditor. So those negotiations are still ongoing just as with the bondholders,” Breuer said.

He further said:

“We have been here from January 11th to 19th. The Economic Reform Program implemented by the Sri Lanka authorities is yielding the first signs of recovery. Real GDP recorded positive growth of 1.6 percent year on year in the third quarter of 2023, which is the first expansion in six consecutive quarters.”

“Shortages of essentials have eased and inflation remains contained. Gross international reserves increased by $2.5 billion during 2023 and preliminary data point to improved fiscal revenue collections during the fourth quarter of 2023.”

“However, challenges remain as these improvements need to translate into improved living conditions for Sri Lanka’s people. In this context, sustaining the reform momentum and ensuring timely implementation of all program commitments are critical to rebuilding confidence and putting the recovery on a firm footing that will benefit all people.”

“Swift progress towards the introduction of a progressive property tax is key to ensuring fair burden sharing while sustaining the revenue-based consolidation. Tax policy measures need to be accompanied by strengthening tax administration, removing tax exemptions, and actively eliminating tax evasion to make reforms more sustainable and to further build confidence among Sri Lanka’s creditors to regain debt sustainability to gain their support.”

“Building on the central bank’s success in taming inflation, future monetary policy decisions should remain prudent, with a focus on keeping inflation expectations well anchored. Against continued uncertainty. It remains important to continue rebuilding external buffers through strong reserve accumulation and protecting the poor and the vulnerable through improved targeting and better coverage of cash transfers remains critical.”

“To safeguard the stability of the financial sector and bolster its capacity to support economic growth, the authorities need to urgently finalize amendments to the Banking act in line with their commitment under the IMF supported program, implement bank recapitalization plans, and strengthen financial supervision and crisis management frameworks.”

“Following the publication of the IMF Governance Diagnostic Report, it is now imperative for the authorities to adopt their own action plan for implementing the recommendations in the report beyond the priority commitments under the EFF arrangement. At the same time, ensuring an enabling environment for governance and transparency reforms to take place is key to bolstering public confidence and facilitating implementation of these important efforts”.

“The authorities have made commendable progress with putting debt on a path towards sustainability. The execution of the domestic debt restructuring was an important milestone. A swift completion of final agreements with official creditors and reaching a resolution with external private creditors remain critical. Progress in meeting key commitments under the IMF supported program will be formally assessed in the context of the second review of the EFF arrangement alongside the forthcoming 2024 Article IV Consultation, which will assess Sri Lanka’s economic health.”

Breuer said that the Mission’s visit to the northern and eastern provinces enriched their understanding of the challenges as well as the potential of Sri Lanka.