SL’s economic policy mix helping recovery – IMF | Sunday Observer

SL’s economic policy mix helping recovery – IMF

3 June, 2018

International Monetary Fund (IMF), which on Friday approved the disbursement of Sri Lanka’s fourth tranche amounting to US$ 252 million, says Sri Lanka’s efforts to improve the policy mix is supporting the island’s economic recovery.

The approval of the latest tranche under the three-year US$1.5 billion Extended Fund Facility (EFF) entered into in June 2016 will bring total disbursements to Sri Lanka to US$ 1.014 billion to date. “Sri Lanka has made important progress under its Fund-supported program. The authorities’ efforts to improve the policy mix through fiscal consolidation, prudent monetary policy, and landmark structural reforms are supporting economic recovery, despite recent shocks,” Acting Chair and Deputy Managing Director, Mitsuhiro Furusawa said following the Executive Board’s discussion of the review.

Furusawa, however, noted that sustaining reform momentum is critical to strengthen the country’s resilience to shocks, given the still sizable public debt and low external buffers, and to set the foundation for strong and inclusive growth. He identified that while financial soundness indicators remain stable, continued credit growth in the real estate sector warrants close monitoring.

“Further progress with revenue-based fiscal consolidation, supported by the new Inland Revenue Act, is needed to help safeguard important social and infrastructure spending, including in response to natural disasters. Going forward, a robust fiscal rule and medium-term debt management strategy will help place debt firmly on downward path,” the Acting Chair and Deputy MD of the Fund, outlined.

Pointing out that the recent approval of an automatic fuel pricing formula is a major achievement towards reducing fiscal risks from State-Owned Enterprises (SOEs), he, however, opined it is essential for the authorities to implement an automatic pricing formula for electricity and a restructuring plan for SriLankan Airlines, as well as further strengthening SOE governance and transparency.

The impact of the reforms on the vulnerable can be mitigated by ongoing efforts to strengthen social safety nets, he said.

Commenting on monetary policy, Furusawa noted that the Central Bank should continue to manage it prudently in the face of price shocks and market volatility.

He said that efforts to build up international reserves should be sustained, with exchange rate flexibility as the first line of defense in response to volatile global capital flows while upgrading the Central Bank law will be instrumental for the new inflation targeting framework.

“The authorities should step up implementation of structural reforms, with a focus on fostering gradual trade liberalisation and the investment climate, developing a natural disaster risk financing framework, and promoting gender equality in the labour market with well-targeted social safety nets,” the IMF official emphasized.

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