ECONOMYNEXT – Washington-based International Monetary Fund has approved the release of a 334 million dollars tranche under Sri Lanka’s program, urging continued reforms, tax collections and better state energy pricing.
“The recovery is expected to continue in 2025,” Deputy Managing Director Kenji Okamura said in a statement.
“As the economy is still vulnerable, it is critical to sustain the reform momentum to ensure macroeconomic stability and debt sustainability, and promote long-term inclusive growth.
“There is no room for policy errors.”
The IMF urged Sri Lanka to keep the momentum on collecting taxes.
“Boosting tax compliance and refraining from tax exemptions are key to maintaining support for economic reforms,” the agency said.
“Going forward, social support needs to be well-targeted towards the most disadvantaged so as to promote inclusive growth with limited fiscal space.
“Restoring cost-recovery electricity pricing without delay is needed to contain fiscal risks from state-owned enterprises.”
Sri Lanka should wrap up agreements with remaining bilateral creditors and monetary policy should focus on price stability, the statement said.
“Monetary policy should prioritize maintaining price stability, supported by sustained commitment to prohibit monetary financing and safeguard Central Bank independence,” the IMF said.
There have been concerns by analysts however whether Sri Lanka has a credible monetary operating framework to maintain ‘price stability’ due to a 5 percent inflation target which had created serial currency crises and external default in the past.
There have also been warnings that the inflation target in general conflicts with a foreign reserve collecting requirement under the IMF program as the central bank pushes down rates with inflationary open market operations via an abundant reserve regime, involving ‘monetary financing’ of the private sector credit.
In both the 2009 (in 2012) and 2016 (in 2018) programs, Sri Lanka has missed reserve targets after inflationary open market operations to cut rates as private credit recovered strongly and more energy SoE losses following currency collapses.
The rising food and energy prices from the falling currency then triggers political instability including during the stabilization crises that follows, discrediting of the IMF program and de-railing or reversal of reforms by a new administration.
Analysts have blamed bad monetary anchors Sri Lanka’s inflation diverging from the US after 1978 and anchor conflicts in general for repeated IMF stand-by programs, exchange and trade controls.
The full statement is reproduced below:
IMF Executive Board Completes the Third Review Under the Extended Fund Facility
Washington, DC – February 28, 2025: The Executive Board of the International Monetary Fund (IMF) completed the third review under the 48-month Extended Fund Facility (EFF) Arrangement, allowing the authorities to draw SDR 254 million (about US$334 million). This brings the total IMF financial support disbursed so far to SDR 1.02 billion (about US$1.34 billion).[1]
The EFF arrangement for Sri Lanka was approved by the Executive Board on March 20, 2023 (see Press Release No. 23/79) in an amount of SDR 2.286 billion (395 percent of quota or about US$3 billion. The program supports Sri Lanka’s efforts to restore and maintain macroeconomic stability and debt sustainability while protecting the poor and vulnerable, rebuild external buffers, and enhance growth-oriented structural reforms including by strengthening governance.
Following the Executive Board discussion on Sri Lanka, Mr. Kenji Okamura, Deputy Managing Director, issued the following statement:
“Reforms in Sri Lanka are bearing fruit and the economic recovery has been remarkable. Inflation remains low, revenue collection is improving, and reserves continue to accumulate. Economic growth averaged 4.3 percent since growth resumed in the third quarter of 2023. By end-2024, Sri Lanka’s real GDP is estimated to have recovered 40 percent of its loss incurred between 2018 and 2023. The recovery is expected to continue in 2025. As the economy is still vulnerable, it is critical to sustain the reform momentum to ensure macroeconomic stability and debt sustainability, and promote long-term inclusive growth. There is no room for policy errors.
“Program performance has been strong with all quantitative targets met, except for the indicative target on social spending. Most structural benchmarks due by end-January 2025 were either met or implemented with delay.
“Sustained revenue mobilization is crucial to restoring fiscal sustainability and ensuring that the government can continue to provide essential services. Boosting tax compliance and refraining from tax exemptions are key to maintaining support for economic reforms. To ease economic hardship and ensure the poor and vulnerable can participate in Sri Lanka’s recovery it is important to meet social spending targets and continue with reforms of the social safety net. Going forward, social support needs to be well-targeted towards the most disadvantaged so as to promote inclusive growth with limited fiscal space. Restoring cost-recovery electricity pricing without delay is needed to contain fiscal risks from state-owned enterprises. A smoother execution of capital spending within the fiscal envelope would foster medium-term growth.
“The progress to advance the debt restructuring to restore Sri Lanka’s debt sustainability is noteworthy. The recent successful completion of the bond exchange is a major milestone towards restoring debt sustainability. Timely finalization of bilateral agreements with creditors in the Official Creditor Committee and with remaining creditors is a priority now.
“Monetary policy should prioritize maintaining price stability, supported by sustained commitment to prohibit monetary financing and safeguard Central Bank independence. Continued exchange rate flexibility and gradually phasing out the balance of payments measures remain critical to rebuild external buffers and facilitate rebalancing.
“Resolving non-performing loans, strengthening governance and oversight of state-owned banks, and improving the insolvency and resolution frameworks are important priorities to revive credit growth and support the economic recovery.
“Prolonged structural challenges need to be addressed to unlock Sri Lanka’s long-term potential, including steadfast implementation of the governance reforms.”
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