IMF Executive Board Completes Second and Third Reviews Under Stand-By Arrangement with Sri Lanka and Approves US$407.8 Million Disbursement

Economic conditions are improving in Sri Lanka, and are likely to show strong growth. The current account remains strong, and tourism arrivals are rapidly improving. Monetary conditions are stable, and the central bank’s policy stance is appropriate. Reforming the board of investment will address the factors that have eroded the tax base and discouraged domestic investors. Fiscal policy adjustment is needed. Tax reform will put in place legislative changes to permanently reform tax concessions. Financial sector reform has continued in line with the program.

Abstract

Economic conditions are improving in Sri Lanka, and are likely to show strong growth. The current account remains strong, and tourism arrivals are rapidly improving. Monetary conditions are stable, and the central bank’s policy stance is appropriate. Reforming the board of investment will address the factors that have eroded the tax base and discouraged domestic investors. Fiscal policy adjustment is needed. Tax reform will put in place legislative changes to permanently reform tax concessions. Financial sector reform has continued in line with the program.

The Executive Board of the International Monetary Fund (IMF) today completed the second and third reviews of Sri Lanka’s economic performance under a program supported by a Stand-By Arrangement (SBA). The completion of the reviews enables the immediate disbursement of an amount equivalent to SDR 275.6 million (about US$407.8 million), bringing total disbursements under the arrangement to an amount equivalent to SDR 689.0 million (about US$1,019.4 million).

The Executive Board also approved a request by the Sri Lankan authorities for a one-year extension of the SBA and accordingly a rephasing of the future disbursements into seven equal amounts of SDR 137.8 million (about US$203.9 million) in light of the recent delay in the program.

The SBA was approved on July 24, 2009 (see Press Release No. 09/266) for an amount equivalent to SDR 1,653.6 million (about US$ 2,446.7 million) or 400 percent of Sri Lanka’s quota.

Following the Executive Board’s discussion on Sri Lanka, Mr. Naoyuki Shinohara, Deputy Managing Director and Acting Chair, stated:

“Overall economic conditions in Sri Lanka are improving and the economy is likely to show strong growth this year. Inflation remains subdued and average inflation for the year as a whole is expected to remain in the single digits. External balances are strong, remittance inflows continue at a high rate, tourism prospects are strengthening rapidly, and gross reserves are at comfortable levels.

“Monetary conditions are stable. Interest rates have declined and credit growth has shown signs of recovering. The central bank’s policy stance remains appropriate, although there may be need to tighten it if credit and inflationary pressures pick up sharply. The central bank has intervened in the foreign exchange market to rebuild reserves, and has allowed the exchange rate to trade within a recently widened, although still narrow band.

“Financial sector reform is in line with the program and has substantially addressed the regulatory weaknesses. The authorities’ reform agenda has been broadened to include the introduction of a deposit insurance scheme, regulation of pension funds, and steps to deepen capital markets.

“Despite the weaker-than-programmed 2009 fiscal performance, the government’s 2010 budget proposal, if carried out, would significantly address past fiscal slippages, mainly through comprehensive tax reforms and sizeable cuts in recurrent spending. At the same time, the budget would allow for much needed reconstruction-related infrastructure investment, while protecting the society’s most vulnerable and addressing the humanitarian needs of those adversely affected by the conflict.

“The authorities’ efforts to reform trade and excise taxes and the Board of Investment’s tax concession regime are a signal that they recognize the importance of a broader tax base and higher revenue in achieving the program’s original goals of fundamental and sustainable reduction of the deficit and the public debt. These efforts should be followed by important steps to permanently reform tax concessions and broaden the VAT and income tax bases to be introduced as part of the 2011 budget.

“To promote private investment and growth, the authorities plan to formulate a national investment strategy, which will include reforms aimed at reducing the currently high cost of doing business in Sri Lanka,” Mr. Shinohara stated.

Sri Lanka: Second and Third Reviews Under the Stand-By Arrangement-Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Sri Lanka.
Author: International Monetary Fund