Post-conflict, Brighter Economic Prospects for Sri Lanka

Marked improvement in economic fundamentals

Reforms to tax system needed for investment and reconstruction

Ongoing reforms to financial sector and business environment

Three decades of war distorted Sri Lanka’s economy, hindered development, and reduced the country’s potential growth. But since the end of the conflict in 2009 and with the help of an IMF loan program, the country’s economic fundamentals have improved markedly.

"This is a critical moment for Sri Lanka and it now needs to continue to implement reforms to maximize its growth potential and ensure the benefits of growth are broadly distributed” said Brian Aitken, the IMF’s mission chief for the country, during a regular review of the IMF-supported program.

Recovery after conflict

Since 2009, the IMF has been assisting the island nation with a $2.6 billion loan program designed to help the country recover from a balance of payment crisis triggered by the global financial crisis and return it to long-term, sustainable growth.

Over the past few decades, Sri Lanka’s public debt grew to unsustainable levels as military spending and debt service costs increased, and budget revenues fell. Its economic difficulties were compounded by the shock of the recent global crisis.

Although the country’s fiscal position is still weak—Sri Lanka has one of the highest public debt-to-GDP ratios among emerging market countries—this is expected to fall steadily over the coming years, while inflation and monetary conditions have eased. The economy is rebounding.

Boosting investment in reconstruction and infrastructure

Higher potential growth will require higher investment and the government has already launched a comprehensive public investment program to address gaps in the country’s infrastructure and reconstruction in the north and east of the country.

With the help of foreign donors, Colombo plans to spend around $1½-2 billion a year on road and rail development, power production, port facilities, and water and sanitation.

The government also recognizes the need for increased investment in not only physical, but also human capital.

Toward a more equitable tax system

To help generate money for increased spending, and keep deficits under control, the IMF has supported a fundamental reform of the tax system. In the 2011 budget, the Sri Lankan authorities proposed measures to simplify the tax system, broaden the tax base, reduce rates, and spread the tax burden more equitably. This will...