- Public debt at unsustainable levels
- Manage Colombo Port City Project
- Fight corruption
The International Monetary Fund (IMF) has asked the Sri Lanka government to urgently implement a credible and coherent strategy to restore macroeconomic stability and debt sustainability.
In a press release issued after the 2021 Article IV consultation with Sri Lanka, the IMF Executive Board said these measures must be taken because of the mounting challenges the country is facing. These challenges include public debt that has risen to unsustainable levels, low international reserves, and persistently large financing needs in the coming years.
Parallel with these measures, it emphasized the need for the government to protect vulnerable groups and to reduce poverty through strengthened, well-targeted social safety nets.
Among its other recommendations, the IMF emphasized the need for an ambitious fiscal consolidation that is based on high-quality revenue measures. Noting Sri Lanka’s low tax-to-GDP ratio, it saw scope for raising income tax and VAT rates and minimizing exemptions, complemented with revenue administration reform. It encouraged continued improvements to expenditure rationalization, budget formulation and execution, and the fiscal rule. Sri Lanka government authorities are also being encouraged to reform state-owned enterprises and adopt cost-recovery energy pricing.
The IMF points out that a tighter monetary policy stance is needed to contain rising inflationary pressures, while phasing out the Central Bank’s direct financing of budget deficits. They also recommend a gradual return to a market-determined and flexible exchange rate to facilitate external adjustment and rebuild international reserves. It called on the authorities to gradually unwind capital flow management measures as conditions permit.
Noting financial stability risks from the public debt overhang and sovereign-bank nexus, the IMF recommended close monitoring of underlying asset quality and identifying vulnerabilities through stress testing.
The IMF called for renewed efforts on growth-enhancing structural reforms. It stressed the importance of increasing female labor force participation and reducing youth unemployment. Further efforts are needed to diversify the economy, phase out import restrictions, and improve the business and investment climate in general.
The IMF also called for a prudent management of the Colombo Port City project and continued efforts to strengthen governance and fight corruption.
To read the full press release click on: IMF
