Sri Lanka: Third Review under the Extended Arrangement under the Extended Fund Facility and Request for Modification of Performance Criterion
Author: International Monetary Fund. Asia and Pacific Dept
Publication Date:
12 Jan 2018
eISBN:
9781484337035
Language:
English
Keywords:
ISCR; CR; SDR; disbursement of the equivalent of SDR; monetary policy; discussion of the review; government; headline inflation; authorities request; government deposit; core inflation; government system; reserve fund
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Third Review under the Extended Arrangement under the Extended Fund Facility and Request for Modification of Performance Criterion-Press Release; Staff Report; and Statement by the Executive Director for Sri Lanka

Abstract

Third Review under the Extended Arrangement under the Extended Fund Facility and Request for Modification of Performance Criterion-Press Release; Staff Report; and Statement by the Executive Director for Sri Lanka

Background

1. Macro stabilization and two major tax reforms were the key outcomes of the first half of the program. Sri Lanka is pursuing a 3-year reform program with IMF support under the extended arrangement under the Extended Fund Facility (EFF) since June 2016. Performance has been broadly on track regarding fiscal consolidation, revenue mobilization, monetary policy management, and reserves accumulation. The government legislated in 2016 the VAT amendments which increased VAT rates and narrowed exemptions. The program’s landmark reform, the new Inland Revenue Act, was legislated in October 2017 and will be implemented in April 2018. Consistent with the objectives of the EFF-supported program, the authorities announced a new far-reaching economic plan titled Vision 2025 in September 2017.

2. Nonetheless, many challenges lie ahead to sustain the reform momentum. The government faces higher debt repayments starting in 2018 at a time when the economy remains vulnerable to shocks. Progress in several structural areas including SOE reforms remains slow. Sustained efforts are needed to further reduce the fiscal deficit, strengthen external buffers, and promote inclusive growth. Political cohesion of the coalition government may be strained in the run-up to the 2020 national elections.

Recent Developments

3. Weather-related supply shocks dominated growth and inflation developments in 2017. Contracting agriculture—due to the 2016 drought and 2017 floods—pulled down GDP growth to 3.9 percent (y/y) in 2017H1 (Box 1). Services grew modestly and industry expanded strongly (5.8 percent) led by construction, mining and quarry. Headline inflation (y/y) exceeded expectations in October 2017 spiking to 7.8 percent, due to weather-driven food inflation and the base effect of VAT rate hikes in November 2016. However, Core inflation declined in October 2017.

4. Capital inflows strengthened, helping to finance the current account and fiscal deficits and reserves accumulation. The current account deficit widened to 3.5 percent of GDP in 2017H1, driven by weather-related imports of food and fuel. While exports strengthened through August due to improved EU access under GSP plus, workers’ remittances and tourism receipts were weak. Portfolio inflows, however, strengthened in 2017Q2 amid a favorable global market environment, with some US$700 million flowing into government securities on net basis over April–September, helping to keep borrowing costs in check. Gross international reserves (GIR) increased from US$6 billion at end-2016 to US$7.3 billion at end-September (3.3 months of imports of goods and services), reflecting steady foreign exchange (FX) purchases by the central bank (about US$1.6 billion over March-October) and a successful placement of sovereign bonds of US$1.5 billion in May.

5. Market interest rates declined, and credit growth remained high. Treasury bond yields dropped by 250 basis points during March–September 2017, reflecting strong capital inflows and lower domestic financing, reversing the rising trend since early 2015. Sri Lanka’s EMBI spread, at 330 bps in 2017Q3, has remained stable throughout 2017. Bank lending rates have been broadly stable since March. Though slowing down gradually with monetary tightening since 2016, private sector credit growth remained high at 17.5 percent (y/y) in September, about double the annual growth rate of nominal GDP. Despite dampening effects due to tightened loan-to-value (LTV) limits on vehicle loans in January, credit growth remained broad-based with no clear signs of a slowdown in month-on-month terms. Staff analysis suggests that the credit gap has widened to around 7 percent of GDP.

A01ufig1

Private Sector Credit Growth

(Percent)

Citation: IMF Staff Country Reports 2018, 003; 10.5089/9781484337035.002.A001

Source: CBSL and IMF staff calculations.
A01ufig2

Credit to GDP Ratio and its Cyclical Trend

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 003; 10.5089/9781484337035.002.A001

Source: CBSL and Staff Calculations*Credit gaps were computed using the one-sided Hodrick-Prescott filter, with quarterly data and a relatively high smoothing parameter (lambda equal to 400,000). It is well documented that the results are sensitive to the choice of the filter and the smoothing parameter. Various values of lambda were used, all of which gave a positive credit gap.

Outlook and Risks

6. Staff’s baseline envisages the economy normalizing in 2018. Real GDP growth is projected to increase from 4.2 percent in 2017 to 4.6 percent in 2018, as agriculture recovers with the return of normal weather conditions while construction and services remain resilient. Similarly, inflation is projected to revert to around 5 percent in end-2017 and throughout 2018. The current account deficit is projected to shrink from 3 percent of GDP in 2017 to 2.5 percent in 2018. Over the medium term, growth is projected to reach about 5 percent, consistent with staff estimate of potential growth.

7. Downside risks remain significant. Given the high level of public debt and need for further fiscal consolidation, fiscal risks include ineffective implementation of the IRA, further delays in SOE reforms, and failure to provide for weather calamities. Too slow a deceleration in credit growth could add to the financial sector vulnerability, and some upside risks to near-term inflation outlook remain. External risks center around a possible reversal of the sizeable portfolio inflows which could raise domestic borrowing costs at a time when large external payments fall due, and could erode the recent gains in building external buffers if international reserves would again be used to defend the currency.

8. Sri Lanka’s external position remains weaker than implied by fundamentals and desirable policy settings. While the current account gap remains moderate and international reserves have increased, reserve coverage remains low by most adequacy metrics (65 percent of the ARA metric and 86 percent of short-term debt at remaining maturity in September 2017). The real effective exchange rate has depreciated by 5 percent since end-2016, helping to reduce the overvaluation which was estimated to exceed 10 percent at the end of 2016 (CR/17/253). However, these gains could be offset quickly through higher inflation and structurally weak competitiveness (paragraph 26).

9. Risks to public debt sustainability remain elevated (Annex I). Public debt, comprising central government debt, guaranteed debt, and Fund credit outstanding, is expected to rise slightly to 87 percent of GDP in 2017 due to the still large fiscal deficit and the weaker exchange rate.1 Moreover, the government faces large amortization payments in 2018, along with repayments on its international sovereign bonds starting in 2019. Gross financing needs (amortization payments plus overall deficit) are projected to reach 20 percent of GDP in 2018. Targeting an overall deficit of 3.5 percent of GDP by 2020 will reduce the risk of debt distress by lowering the debt ratio to 81 percent of GDP by 2020 and 75 percent by 2022. SOE liabilities also constitute a major fiscal risk, although they decreased from 13.7 percent of GDP in 2015 to 11.9 percent of GDP in 2016. External debt remains sustainable, though with high currency risks.

A01ufig3
Sources IMF Fiscal Monitor database; Sri Lankan authorities; and IMF staff estimates.

Program Performance

10. Quantitative targets. End-June quantitative performance criteria (QPC) on central government primary balance and net international reserves and indicative targets (IT) for June and September were all met. The continuous PC (no new external arrears) has also been met. The monetary policy consultation clause has not been triggered as inflation remained within the target band.

Sri Lanka: EFF-Supported Program: Performance Against Quantitative Targets 1/

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Cumulative from the beginning of the year, except for reserve money.

11. Structural benchmarks (SBs). Four out of 5 SBs slated for completion by November 2017 were implemented (Table 2 attached to the Memorandum of Economic and Financial Policies (MEFP)).

Table 1.

Sri Lanka: Selected Economic Indicators, 2015–22

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Sources: Data provided by the Sri Lankan authorities; and IMF staff estimates.
Table 2a.

Sri Lanka: Summary of Central Government Operations, 2015–22

(In billions of rupee)

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Sources: Data provided by the Sri Lankan authorities; and IMF staff estimates.

For 42 nonfinancial SOEs reported in MOF Annual Reports.

The figure does not cover all nonfinancial SOEs. It covers financial obligations of Ceylon Electricity Board, Ceylon Petroleum Corporation, Road Development Authority, Sri Lanka Ports Authority, Sri Lankan Airlines, and other SOEs.

Table 2b.

Sri Lanka: Summary of Central Government Operations, 2015–22

(In percent of GDP)

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Sources: Data provided by the Sri Lankan authorities; and IMF staff estimates.

For 42 nonfinancial SOEs reported in MOF Annual Reports.

The figure does not cover all nonfinancial SOEs. It covers financial obligations of Ceylon Electricity Board, Ceylon Petroleum Corporation, Sri Lanka Ports Authority, Road Development Authority, Sri Lankan Airlines, and other SOEs.

Table 2c.

Sri Lanka: Summary of Central Government Operations, 2017–18

(In billions of rupees)

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Sources: Data provided by the Sri Lankan authorities; and IMF staff estimates.

  • On November 9, the authorities submitted to Parliament the 2018 budget consistent with the program targets and staff recommendations, meeting the prior action for the third review2. In addition, the 2018 budget includes a tax expenditure statement, a plan to rationalize tax expenditures, and the estimated cost of SOEs’ non-commercial obligations (SB, November 2017).

  • A report outlining the cost of non-commercial obligations for fuel and electricity (SB, September 2017) was published in November as an annex to the 2018 budget.

  • A diagnostic review of the VAT system (SB, June 2017) was completed in November.

  • The authorities have opted to postpone designing compliance strategies for income taxes (SB, June 2017) until the new IRA is fully operational in 2018.

  • The Monetary Board of the Central Bank of Sri Lanka (CBSL) approved a roadmap for flexible inflation targeting and flexible exchange rate regime (SB, October 2017).

Policy Discussions

The authorities pledged to target a primary surplus of 1 percent of GDP in 2018, while requesting a small adjustment of the end-2017 fiscal target due to the weather calamities. The authorities pledged to build up net international reserves by about US$700 million in 2018, and undertake energy pricing reforms.

A. Fiscal Consolidation Needs to Continue

12. Revenue mobilization continues. Tax revenues increased by 9.3 percent (y/y) in real terms in January–September 2017, driven by a 56.6 percent surge in VAT collections following the VAT amendment in November 2016. The projected 2017 outturn implies a tax to GDP ratio of 12.9 percent, 1 percentage point higher than in 2015 (excluding one-off factors). When implemented, the new IRA is expected to boost revenues further by about ½ percent of GDP (annualized) largely through removal of tax exemptions. Revenue mobilization has also been supported by tax administration reforms, including roll-out of the RAMIS IT system and VAT compliance strategies.3 Nevertheless, tax revenues are projected to fall short of the 2017 IT by 0.3 percent of GDP, reflecting temporary factors related to the weather calamities and the delay in implementing the new IRA.

A01ufig4

Sri Lanka: Tax Revenue

(In percent of GDP)

Citation: IMF Staff Country Reports 2018, 003; 10.5089/9781484337035.002.A001

Source: IMF staff calculations.Note: The collection of the super gains tax in 2015 is excluded.
A01ufig5

Sri Lanka: Tax Revenue

(In percent of GDP)

Citation: IMF Staff Country Reports 2018, 003; 10.5089/9781484337035.002.A001

Source: IMF staff calculations.Note: The collection of the super gains tax in 2015 is excluded.

13. The authorities requested relaxing the 2017 fiscal targets due to the exceptionally severe weather events. Between the protracted effects of the 2016 nationwide drought and the devastating 2017 floods in the southwest (Box 1), the spending needs exceeded the space that could be generated by mid-year budget reallocation and spending rationalization. As a result, the authorities requested lowering the QPC ceiling on primary deficit by Rs 20 billion to Rs 23 billion (0.2 percent of GDP) and the tax revenue IT floor by about 40 billion (0.3 percent of GDP) for end-2017. This temporary adjustment is smaller than the Rs 68 billion overperformance in the 2016 primary balance QPC and will be offset by higher disaster provisions and more front-loaded fiscal consolidation in the 2018 budget. Staff supports the request and offsetting adjustments, and noted that drought-driven cost for higher thermal electricity generation should be contained to limit the increase of SOE debt of Ceylon Electricity Board (CEB).

14. The authorities pledged to target a primary surplus of 1 percent of GDP in 2018, supported by a revenue package. The authorities’ overall deficit target of 3.5 percent of GDP by 2020 is consistent with reaching a primary surplus of 2½ percent of GDP by 2020. To anchor investor confidence amid looming financing needs, the authorities agreed to frontload the fiscal consolidation path and target a primary surplus of 1 and 2 percent of GDP in 2018 and 2019, respectively, despite the lead time for revenue measures. The 2018 budget submitted to Parliament in November was consistent with these program targets and staff recommendations, meeting the prior action for the review. The revenue package in the budget is estimated to yield 0.8 percent of GDP, which comes mostly from selected removal of VAT exemptions, changes to excise taxes, and new levies on telecom usage and cash transactions by financial institutions. While the package safeguards social and infrastructure spending, its composition could have relied more on VAT base-broadening. The budget accommodates appropriations for natural disaster mitigation programs such as crop insurance and urban flood mitigation, totaling 0.15 percent of GDP.

Sri Lanka: Summary of Central Government Operations

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Sources: Data provided by the Sri Lankan authorities; and IMF staff estimates.

15. Implementing the new IRA in April 2018 and IT-based spending commitment control will support the 2018 budget. The IRA steering committee has outlined an implementation workplan, including publishing tax manuals (new SB by January 2018), updating regulations, training tax administrators, conducting taxpayer outreach, and updating IT systems. Risk of a revenue shortfall will be mitigated by realigning expenditures through the quarterly fiscal reporting to Parliament that started in 2017. The authorities also pledged to modify the existing IT system to implement quarterly commitment ceilings to reduce the risk of arrears in the case of revenue shortfalls, when line ministries start executing the 2018 budget (SB by January). However, staff urged swift implementation of a more effective commitment control by the new integrated IT system (ITMIS), which was delayed to start in 2019.

16. Strengthening public debt management and the fiscal responsibility framework will help manage large financing needs over the medium term. Staff welcomed the efforts to improve debt management, including by drafting a new Liability Management Bill which will allow the government to manage debt maturities and earmark proceeds from commercialization of public assets (e.g., the Hambantota port) for future debt service. The cabinet will approve a strategy for managing international sovereign bonds maturing over 2019–22 (a new SB by June 2018). To reinforce fiscal discipline, the authorities’ Vision 2025 aims to strengthen the Fiscal Management Responsibility Act with binding targets on fiscal deficit and government debt, which staff will support including through TAs.

B. Accelerate SOE Reforms

17. The weak financial performance of major SOEs in 2017 highlights the need for timely reforms. Three SOEs closely monitored under the program—CEB, Ceylon Petroleum Corporation (CPC), and SriLankan Airlines—recorded a combined loss of Rs 52 billion in 2017H1 (0.4 percent of GDP) as opposed to a combined profit of 0.2 percent of GDP in 2016. Rising oil prices and weather shocks raised the cost of non-commercial obligations (NCOs) to supply electricity and fuel at prices below cost-recovery levels. The efforts to restructure the airline has hit an impasse, as the search for a strategic partner restarted under the new task force overseen by the Prime Minister’s office. Future program reviews will discuss the action plan for the airline and set key milestones as an SB. Leveraging upon the publication of Statements of Corporate Intent (SCIs) by 5 major SOEs in April 2017, the authorities are developing a framework for evaluating performance against key performance indicators, and plan to expand SCIs to other SOEs.

Sri: Lanka: Performance of CEB, CPC, and SriLankan Airlines, 2017H1

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Sources: Sri Lankan authorities; and IMF staff estimates.

18. The authorities are embarking on fuel and electricity pricing reforms. To address the delay in adopting automatic pricing mechanisms, the second review recalibrated the reforms into a sequence of steps. The first step focuses on increasing transparency: a report outlining the cost of NCOs for fuel and electricity (SB) was completed with delay, and the establishment of a Bulk Supply Transactions Account is expected by March 2018 (SB) to enhance transparency of electricity NCOs. The second step sets at zero a new IT (ceiling) on uncompensated cost of fuel and electricity NCOs (i.e., cost of NCOs minus government transfers, Annex III) for 2018, which will encourage the authorities to recognize the quasi-fiscal subsidies as above-the-line government spending and incentivize cost-reflective pricing. Finally, cabinet will approve automatic pricing mechanisms for fuel by March 2018 and for electricity by September 2018 (SBs).

A01ufig6

Sri Lanka: Sequence of Energy Pricing Reforms

Citation: IMF Staff Country Reports 2018, 003; 10.5089/9781484337035.002.A001

Source: IMF staff.

C. Monetary Policy to Rein in Inflation Pressures

19. Monetary policy should maintain a tightening bias until clearer signs emerge that inflation and credit growth have stabilized, supported by macroprudential measures as needed. The CBSL has kept the policy rate unchanged since a 25-bps hike in March 2017, amid indications that credit growth and weather-related price pressures are moderating gradually. Near-term inflation, however, still faces upside risk from still high credit growth, a tight labor market, and the depreciating rupee. Reflecting these concerns, staff recommended the CBSL continue to assess the lagged response to monetary tightening since 2016, while maintaining a tightening bias until clear signs emerge that inflation and credit growth have stabilized. Macroprudential measures can be used to address systemic risks arising from excessive credit growth (paragraph 24).

20. The authorities reaffirmed their commitment to accumulate reserves while winding down FX swaps. Since resuming reserves accumulation in March 2017, the CBSL has accumulated net international reserves (NIR) beyond program targets through steady FX purchases against capital inflows. For 2018, the authorities target to increase NIR (program definition) by around US$700 million, bringing the end-2018 GIR to US$8.0 billion, equivalent to 67 percent of the ARA metric and 3.4 months of import. The CBSL plans to further wind down FX swaps with commercial banks (US$1.85 billion at end-September) to improve the composition of reserves.

21. In the face of substantial balance of payment pressures, Sri Lanka imposed in April 2016 a repatriation requirement for export proceeds while the country launched macroeconomic adjustments under the EFF-supported program in June 2016. This repatriation requirement could potentially discourage exporters’ outward investments (capital outflows) by increasing the cost of outward payments and transfers, constituting a capital flow management measure (CFM), according to the Fund’s Institutional View (IV) on capital flows. The repatriated export proceeds do not need to be converted into rupees and can be freely taken out from the country with no restrictions on their overseas use. Consequently, the measure has encouraged exporters to keep FX within the domestic financial system and helped reduce the imbalance in the FX market. The authorities are of the view that eliminating the measure at the current juncture could be premature as Sri Lanka remains vulnerable to shocks especially with international reserves remaining below the adequate level, while staff recommends removing this temporary measure as policy adjustments are implemented, for CFMs should not be used to substitute for warranted macroeconomic adjustment. The pace to phase out this temporary measure will be further discussed in the Article IV consultation in early 2018, together with Sri Lanka’s overall efforts to further liberalize the capital account and develop the FX market.

22. The FX market has deepened, enhancing price discovery. Since June 2017, the CBSL has withheld from intervening in the FX market, except to accumulate reserves. Combined with continued capital inflows, this has contributed to raising transaction volumes in the spot FX market and two-way exchange rate movements. Building on these positive developments, the authorities should consider adopting FX auctions and rules-based FX policies to further develop the FX market while providing a more transparent structure to accumulate reserves.

A01ufig7

CBSL FX purchases, 2017

(In US$ millions)

Citation: IMF Staff Country Reports 2018, 003; 10.5089/9781484337035.002.A001

Source: CBSL.
A01ufig8

FX Market Turnover and Exchange Rate Volatility, 2017

Citation: IMF Staff Country Reports 2018, 003; 10.5089/9781484337035.002.A001

Source: CBSL and IMF staff estimates.

23. The Monetary Board of the CBSL approved a roadmap for flexible inflation targeting and a flexible exchange rate regime (SB). Consistent with IMF TA recommendations, the roadmap identifies time-bound reform measures to be taken over the next few years, including: revising the Monetary Law Act (MLA) to establish price stability as the primary objective of monetary policy; addressing CBSL’s direct fiscal financing for a clearer separation between fiscal and monetary policies; establishing a transparent auction mechanism for reserves accumulation while enhancing FX flexibility gradually; modifying the existing policy rate structure; assessing financial sector risks associated with adopting inflation targeting and greater FX flexibility; and strengthening public communication. The cabinet approval of a policy note outlining the key elements of amendments to the MLA has been set as a new SB due by March 2018.

D. Financial Policies to Safeguard Stability

24. While financial soundness indicators remain stable, credit growth needs further stabilizing to reduce the positive credit gap and head off a buildup of systemic vulnerability. The capital adequacy ratio of the banking system has stabilized at around 15 percent in 2017H1, and the NPL and provision coverage ratios have improved to 2.7 percent and 67 percent in 2017Q2, respectively. However, broad-based credit growth far above nominal GDP growth leaves open the positive credit gap (paragraph 5), raising the risk of negative systemic spillovers from financial shocks (e.g., a sizable reversal of portfolio inflows) propagated through excessive leverage associated with the real estate sector. Macroprudential measures, the need for which the authorities are evaluating through new surveys on credit growth, can include lower LTV limits on mortgages, higher capital weights on mortgages and other construction-related debt, and overall debt-to-income limits on consumer loans. The authorities also expressed preliminary interest in a Financial System Stability Review, which staff welcomes.

25. Financial sector supervision should be further strengthened to address potential vulnerabilities. The migration to the Basel III capital standards began in July 2017 and all banks met the initial requirements. With the minimum capital ratios set to rise to international standards by January 2019, banks should develop appropriate strategies to comply with the schedule. In addition, the authorities will establish a new Resolution and Enforcement Department within the CBSL; double the minimum equity capital requirement of all licensed banks by end 2020, to enhance stability and encourage consolidation; and upgrade legislation (e.g., the Banking Act). While some progress has been made in improving the AML/CFT regime, significant deficiencies remain, and Sri Lanka was placed under the Financial Action Task Force (FATF) monitoring process in October. Staff recommends that Sri Lanka enhance the effectiveness of the supervisory framework, enact FATF-compliant AML/CFT laws and regulations, and focus on the implementation of the International Cooperation Review Group (ICRG) action plan items.

E. Structural Reforms to Support Fiscal Consolidation and Inclusive Growth

26. Following progress in macroeconomic stabilization, structural reforms are needed to bolster competitiveness and facilitate inclusive growth. The authorities and staff initiated discussions of these reforms, which will be further explored in the upcoming Article IV consultation and be incorporated into the second half of the program. Published in September 2017 with endorsement by the coalition government, the authorities’ Vision 2025 identifies policies to promote inclusive growth in the areas of trade, labor market, logistic infrastructure, social safety nets, and natural disaster management. The program will support its implementation, giving priority to structural reforms in the following areas:

  • Reforms in trade and investment regimes. The new IRA strengthens public governance and creates a transparent and predictable business environment, by adopting a simple and rules-based framework while shunning a discretionary and fragmented system of incentives. Automation of government’s tax and public finance management systems (SBs) should continue to improve transparency and efficiency of government systems. The authorities have also formulated a new trade policy that aims to facilitate trade and remove barriers to foreign investment entry and establishment. Bilateral trade negotiations are ongoing with large regional markets, while GSP plus status with EU resumed in mid-2017. With the support of development partners, government has reviewed para-tariffs and other nontariff barriers for gradual phasing out, which should be aligned with the fiscal consolidation under the program.

  • Increasing female labor participation. The low female labor participation (36 percent in 2017Q2) despite high education attainment calls for policies and labor market reforms that can increase female labor participation and enhance inclusive growth, including flexible work arrangements and more accessible child care service. The authorities are considering legislative reforms to introduce quotas on female representation in Parliament and local governments.

  • Addressing climate change. Disaster management needs to strengthen to address Sri Lanka’s vulnerability to natural disasters, which has imposed sizable costs in both economic and humanitarian terms. Recognizing the dangers from climate change, staff recommended strengthening adaptation and mitigation measures, including disaster-resilient infrastructure and stronger fiscal buffers in future budgets.

Program Monitoring

27. The attached Letter of Intent (LOI) and the MEFP describe the authorities’ progress and commitments to implement their economic program (Appendix I). The authorities request, with staff supporting, to modify the primary balance QPC and the tax revenue IT for end-December to reflect the developments since the second review (Table 1 attached to the MEFP and the TMU). Quarterly targets for 2018 are proposed, including the June QPC on primary balance and NIR, and a new IT on NCOs for fuel and electricity. As a prior action for the third review, the authorities submitted the 2018 budget to Parliament consistent with the program and staff recommendations. The proposed list of SBs includes 3 new benchmarks (Table 2 attached to the MEFP).

28. The program remains fully financed for the next 12 months, but risks remain significant. Firm financing assurances from the World Bank, the Asian Development Bank, and key bilateral donors, are in place, and prospects are favorable for adequate multilateral and bilateral financing for the remainder of the program. Capacity to repay the Fund remains adequate under the baseline scenario, while the downside risks discussed above may necessitate further adjustment or additional financing (Table 9). Key risks to the program are still present: (i) revenue slippage; (ii) weaker than expected net capital inflows and reserves shortfall; (iii) lower than expected growth and/or new pressures on the trade account; and (iv) larger than expected losses at SOEs and slow progress in SOE reforms (paragraph 7-9).

Table 3.

Sri Lanka: Central Government Financing Needs, 2015–18

(In billions of rupees, unless otherwise indicated, end of period)

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Sources: Data provided by the Sri Lankan authorities; and IMF staff estimates.
Table 4a.

Sri Lanka: Monetary Accounts, 2015–18

(In billions of rupees, unless otherwise indicated, end of period)

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Sources: Central Bank of Sri Lanka; and IMF staff projections.

Calculated using end-period quarterly GDP, annualized.