Sri Lanka’s three-year extended arrangement was approved on June 3, 2016 in the amount of about SDR 1.1 billion (US$1.5 billion, or 185 percent of quota in the IMF at that time. See Press Release No. 16/262). The government’s reform program, supported by the IMF, aims to reduce the fiscal deficit, rebuild foreign exchange reserves, and introduce a simpler, more equitable tax system to restore macroeconomic stability and promote inclusive growth. Following the Executive Board’s discussion of the review, Mr. Tao Zhang, Acting Chair and Deputy Managing Director, said: “ Sri Lanka ’s performance under the Fund-supported program has been broadly satisfactory despite challenging circumstances.
Macroeconomic and financial conditions have begun to stabilize, inflation has trended down, and the balance of payments has improved. Meanwhile, international reserves remain below comfortable levels. “Fiscal performance has been encouraging. The reinstatement of the amendments to the value added tax will help boost revenues. The 2017 budget proposal aims to strengthen government finances through revenue mobilization, while guarding against revenue shortfalls by aligning spending with revenue on a quarterly basis. The new Inland Revenue Act scheduled for early next year should result in a more efficient, transparent, and broad-based tax system.
Complementary structural reforms in tax administration, public financial management, and the governance and oversight of state-owned enterprises are critical for durable fiscal consolidation. “While inflation has abated, credit growth remains strong. The central bank indicates its readiness to tighten the monetary policy stance further if inflationary pressures resurge or credit International Monetary Fund 700 19th Street, NW Washington , D. C. 20431 USA 2 growth persists.
The authorities intend to continue building up reserves through outright purchases while allowing for greater exchange rate flexibility. “The banking sector is currently well capitalized. Steps are being taken to find a resolution mechanism for the distressed financial institutions. Going forward, there is a need to strengthen the supervisory and regulatory framework, and identify and mitigate vulnerabilities in the financial sector, particularly with regard to non-banks and state-owned banks.