IMF Country Report No. 18/175: Sri Lanka
Core Content
This document outlines the results of the 2018 Article IV Consultation and the Fourth Review under the Extended Arrangement under the Extended Fund Facility (EFF) for Sri Lanka. It includes a Press Release, Staff Report, and a Statement by the Executive Director, detailing the economic performance, program progress, and future outlook for the country.
Main Points
Economic Performance and Outlook
- GDP Growth: The Sri Lankan economy is expected to normalize gradually. Real GDP growth is projected at 4% in 2018 and around 5% over the medium term.
- Inflation: Inflation peaked at 7.8% in 2017 due to weather-related shocks but is expected to fall below 5% by the end of 2018, aligning with the Central Bank of Sri Lanka (CBSL) target.
- Fiscal Consolidation: The authorities achieved a primary surplus in 2017 through expenditure management and revenue mobilization, and have made progress in implementing fiscal reforms.
- Monetary Policy: The CBSL has managed monetary policy prudently, curbing credit growth and stabilizing inflation, while also increasing reserve accumulation.
- Exchange Rate: The rupee remained relatively stable in 2017, but experienced a depreciation of around 3% by mid-2018.
Key Challenges
- Public Debt: Public debt remains high, and the economy is vulnerable to adverse domestic and external shocks.
- External Vulnerabilities: External buffers are low, and the country is at risk from global financial liquidity tightening, which could increase government borrowing costs and reduce foreign reserves.
- Political Uncertainty: Political instability ahead of the 2019-20 elections could slow reform efforts.
- Structural Weaknesses: Structural reforms are necessary to improve competitiveness and address macro-financial vulnerabilities.
Program Performance
- The first half of the EFF program has remained broadly on track.
- The CBSL successfully implemented an automatic fuel pricing mechanism and adopted a Roadmap to flexible inflation targeting.
- The authorities have achieved major milestones in their reform agenda, including the launch of the new Inland Revenue Act and progress with SOE and energy-pricing reforms.
Key Reforms and Initiatives
- Fiscal Consolidation: The authorities are encouraged to continue fiscal consolidation through stronger fiscal rules and SOE governance.
- SOE Reforms: Further SOE governance and transparency are needed, with specific focus on restructuring Sri Lankan Airlines and implementing an automatic pricing formula for electricity.
- Monetary and Exchange Rate Frameworks: The CBSL should continue with a data-dependent monetary policy approach and enhance exchange rate flexibility.
- Financial Sector Resilience: The financial sector needs to be strengthened, including through Basel III implementation and macro-prudential tools to control excessive credit growth in the real estate sector.
- Inclusive Growth: Structural reforms should accelerate to promote inclusive growth, including trade liberalization, climate budgeting, and greater female labor force participation.
Executive Board Assessment
- The Executive Board commended Sri Lanka's progress and welcomed the commitment to the program.
- They emphasized the need to maintain reform momentum to sustain growth and strengthen resilience.
- The Board supported the authorities' efforts to improve the policy mix, strengthen institutions, and address fiscal and external risks.
Program Financing and Modalities
- The fourth review under the EFF makes available SDR 177.774 million, bringing total purchases under the EFF to SDR 715.230 million.
- The program is expected to support the economy through continued fiscal consolidation, monetary stability, and structural reforms.
Summary of Key Data
GDP and Inflation (Percent)
| Year |
2015 |
2016 |
2017 |
2018 |
| Real GDP Growth |
5.0 |
4.5 |
4.2 |
4.6 |
| Inflation (average) |
2.2 |
4.0 |
6.0 |
4.8 |
| Inflation (end-of-period) |
4.6 |
4.5 |
5.1 |
4.7 |
| Core Inflation (end-of-period) |
6.7 |
5.8 |
4.6 |
4.6 |
Savings and Investment (Percent of GDP)
| Year |
2015 |
2016 |
2017 |
2018 |
| National Savings |
28.8 |
32.8 |
28.7 |
29.1 |
| Government Savings |
-2.2 |
-0.5 |
-0.9 |
-0.3 |
| Private Savings |
31.0 |
33.4 |
29.7 |
25.6 |
| National Investment |
31.2 |
35.0 |
31.7 |
31.6 |
| Government Investment |
6.4 |
21.9 |
16.3 |
7.3 |
| Private Investment |
24.7 |
21.9 |
16.3 |
13.7 |
Balance of Payments (Millions of USD)
| Year |
2015 |
2016 |
2017 |
2018 |
| Exports |
10,547 |
10,310 |
11,244 |
11,861 |
| Imports |
-18,935 |
-19,183 |
-21,040 |
-21,932 |
| Current Account Balance |
-1,882 |
-1,743 |
-2,461 |
-2,180 |
| Current Account Balance (percent of GDP) |
-2.4 |
-2.2 |
-3.0 |
-2.5 |
Gross Official Reserves (USD Millions)
| Year |
2015 |
2016 |
2017 |
2018 |
| Gross Official Reserves |
7,304 |
6,019 |
7,505 |
8,014 |
| Months of Prospective Imports |
3.7 |
2.8 |
3.4 |
3.4 |
| Percent of ARA Composite Metric |
68.9 |
54.7 |
66.9 |
66.5 |
External Debt (Billions of USD)
| Year |
2015 |
2016 |
2017 |
2018 |
| External Debt |
44.8 |
46.5 |
48.3 |
49.5 |
| External Debt (percent of GDP) |
56.4 |
57.4 |
58.2 |
57.4 |
Conclusion
The IMF highlights that Sri Lanka has made progress in fiscal consolidation, monetary policy, and structural reforms, but challenges remain. Sustained reform efforts are critical to enhance resilience, promote inclusive growth, and ensure long-term economic stability. The country needs to maintain momentum in structural reforms, manage public debt, and strengthen external buffers to navigate future risks.
