IMF on Sri Lanka — Many challenges ahead but reform program on track

Ismail Ali Manik
4 min readJan 14, 2018

IMF in its latest assessment of the Sri Lankan economy, confirms that its three year economic reform is broadly on track though with significant challenges ahead.

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.

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.

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.

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.

On the PFM side several reforms are underway;

MOF has modified the existing PFM IT system (CIGAS) and is now capable of tracking spending commitment on a real-time basis for a subset of line ministries. This helped the government to adjust and reallocate spending through cash management. Nonetheless, a system to control commitment, i.e., quarterly commitment ceilings over which the PFM IT system prevents spending units from contracting with vendors, has yet to be put in place, due to delays in rolling out the ITMIS. In the interim, we will further modify the CIGAS and equip it with capability to impose quarterly commitment ceilings for individual spending units from the beginning of 2018 (structural benchmark).

National Budget Department trialed ITMIS to prepare Budget Book by processing budget estimates sent by all ministries and departments in 2016.

To boost transparency, the MOF will begin publishing quarterly financial bulletins summarizing government fiscal operations, ensure that annual budgets explicitly cost out tax expenditures, and adhere to Government Finance Statistics Manual (GFSM) standards. Budgets will also include an analysis of fiscal risks, including those related to SOEs and public-private partnerships (PPPs).

In the Letter of Intent (see below), the authorities requested the modification of the performance criterion on central government primary balance and the indicative target on tax revenue for December 2017.

There has been lot of interesting work done by Harvard Kennedy School with Sri Lankan authorities using the PDIA framework on economic reforms. See Learning to Target for Economic Diversification: PDIA in Sri Lanka

More from the IMF assessment;

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Ismail Ali Manik

Uni. of Adelaide & Columbia Uni NY alum; World Bank, PFM, Global Development, Public Policy, Education, Economics, book-reviews, MindMaps, @iamaniku