Sri Lanka to Reboot Economic Policies

IMF loan to help Sri Lanka navigate macroeconomic policy adjustments and a more difficult external environment

Focus on strengthening fiscal policy by raising tax revenues and bolstering public financial management

Reforms to address state enterprises, move to a more flexible exchange rate, and improve competitiveness

Sri Lanka has gone through a significant political transition against the backdrop of an increasingly difficult external environment. Two major elections in 2015 brought a new government to the helm, major constitutional changes (trimming the power of the presidency) and a reorganization of ministerial agency portfolios. At the same time, surging imports, falling exports, slowing remittances, tepid foreign direct investment, and a steady outward march of capital from government securities markets gave rise to macroeconomic imbalances.

Real GDP growth was 4.8 percent in 2015 (broadly unchanged from 2014), thanks to strong growth in services and agriculture, as well as a positive, albeit declining, contribution from manufacturing. Similarly, the negative growth in construction and weaker growth in manufacturing were indicative of a slowdown in public and private investment, as well as the negative effects of slowing world trade.

Policies to support adjustment and reform

The government’s strategy to address short-term imbalances and medium-term challenges rests on six pillars:

• Fiscal consolidation. Steady reduction of the government budget deficit to lower public debt, bolster investor confidence, and reduce government borrowing.

• Revenue mobilization. Simplifying the tax system and broadening the tax base to ensure transparency and equity, and create space for spending on infrastructure and human capital.

• Public financial management. Strong and consistent control over spending commitments to keep expenditures on target and eliminate waste. Budgets will be transparent and report on foregone revenue from tax exemptions and holidays, as well as risks from state-owned enterprises.

• State enterprise reform. Oversight and financial discipline of state-owned enterprises (SOEs) will be bolstered. SOEs will be bound to a rules-based financial relationship with the central government while giving them sufficient autonomy to function on a commercial basis.

• Enhancing monetary policy. The Central Bank of Sri Lanka will seek to keep inflation low while transitioning to a more flexible exchange rate regime and a flexible inflation...