The Central Bank of Sri Lanka (CBSL), after months of rejecting calls to seek IMF support in the face of the country’s burgeoning economic crisis,said in a statement issued following the release of the International Monetary Fund’s 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 report recommended Sri Lankan authorities to restore macroeconomic stability and debt sustainability, implementing a credible and coherent strategy covering both the near and medium term is needed.
Staff also recommended a comprehensive set of policies with specific measures, including substantial revenue-based fiscal consolidation aided by sweeping tax hikes and cuts in Government spending. “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. Institution building reforms, such as revamping the fiscal rule, would help ensure the credibility of the strategy.”
It also recommended to developing a comprehensive strategy to restore debt sustainability, near-term monetary policy tightening to ensure that the recent breach of the inflation target band is only temporary, gradually restoring 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.
It then recommended to strengthen social safety nets, by increasing spending, widening coverage, and improving targeting, to mitigate the adverse impacts of macroeconomic adjustment on vulnerable groups.
CBSL, in its statement further said the IMF staff team visited Sri Lanka in December 2021, during which consultations were held with the Ministry of Finance (MoF) and the CBSL, as well as several other government agencies, financial institutions and private organisations and individuals, further clarifications sought by the staff team upon their return to the IMF Headquarters, discussion at the Executive Board of the IMF on the Article IV Report, by which time the Sri Lankan authorities had consented in principle to the publication of the Report, a press release being issued by the IMF upon conclusion of the Executive Board discussion, an IMF team visiting the country to apprise the President on the findings of the Article IV consultation, the final clearance being provided by the Sri Lankan authorities, and the publication of the final Report on 25 March 2022.
Meanwhile, the CBSL 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.
At the same time, several policy adjustments have already been made by the MoF and the CBSL. 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.