Global economic uncertainty poses risks to EFF

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By 2017-08-13

The high degree of uncertainty in the global economic environment has elevated economic and financial risks to Sri Lanka's current International Monetary Fund (IMF) Extended Fund Facility (EFF) programme, the recently released EFF second review, Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding document stated.
"The main risks include (i) acceleration of capital outflows, reflecting further strengthening of the US dollar and higher rates which could lead to a further decline in the already low reserves (ii) weaker than projected revenues (iii) weaker than expected capital inflows, which would widen the projected financing gap, given already substantial gross fiscal financing needs of about 19 percent of GDP in 2017 (iv) lower than expected growth or new pressures on the trade account (v) weaker than expected performance of State owned enterprises," it stated.

It also stated that these risks could further challenge public debt and external sustainability.
"Should such risks materialize, the government stands ready to adjust promptly its policies, in close consultation with the IMF staff, to ensure the achievement of a sustainable external position at the end of the programme." Sri Lanka currently has about 200 State owned enterprises representing a substantial share of the nation's economic activity.

With technical assistance from the IMF, Sri Lanka identified outstanding obligations of the central government and...SOEs totalling Rs 1.36 trillion in end-2015. These included (i) outstanding obligations of the Central Government, totalling Rs 58 billion, which were settled during 2016 (ii) those of 4 SOEs (The Ceylon Petroleum Corporation or CPC, The Ceylon Electricity Board or CEB, SriLankan Airlines and the Sri Lanka Port Authority), totalling Rs 1.2 trillion.

Although some SOEs are profitable and performing well, collectively they represent a risk to public finances (either directly or through the State banks that fund the largest SOEs).

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