June 14, 2016 (LBO) – Sri Lanka needs to put its fiscal house in order, the International Monetary Fund said, revealing details of the 1.5 billion dollar 36-month support programme.
“There is a clear need to put tax revenues on an upward path as part of a growth-friendly phase of fiscal consolidation and debt reduction,” the IMF, releasing the government’s letter of intent and staff report, said.
Sri Lanka’s fiscal consolidation drive has been scuttled by political inaction and the new government needs to take clear steps beginning with reform of the Inland Revenue Act this year, reform of VAT in 2017 and customs regulations the year after.
The IMF programme has conditions that aim to increase government revenues, support foreign reserves and reduce government debt and public sector losses, Todd Schneider, IMF’s head of mission, said during a video conference.
To achieve these objectives the program envisages reforms under six pillars.
They are: fiscal consolidation; revenue mobilization; public financial management reform; state enterprise reform; transition to flexible inflation targeting under a flexible exchange rate regime; and reforms in the trade and investment regime.
Sri Lanka’s government, in turn, has promised to take loss-making SriLankan Airlines off its books through a “resolution strategy”, to enhance oversight and discipline of the six largest state-owned enterprises, and to implement automatic fuel and electricity pricing.
In terms of monetary policy, the recent tightening of policy was “a necessary step given rising core inflation and high private credit growth,” the fund said.
“Further tightening may be needed in coming months.”
Over the medium-term, the CBSL will shift to a flexible inflation targeting framework, while it is essential that the Central Bank begins an exit from the present intervention framework, which has bled reserves over the past 20 months.
Commenting on state enterprises: “Implementation of automatic pricing mechanisms for fuel and electricity prices will be essential to preventing fiscal risk and enhancing the role of market forces in the economy.”
“Trade policy reform and elimination of para-tariffs is needed for a stronger outward orientation and to build resilience,” the fund added.