* The IMF urged Sri Lanka to keep the momentum on collecting taxes.
* Boosting tax compliance and refraining from tax exemptions
* Monetary policy should prioritize maintaining price stability
IMF Executive Board Completes the Third Review Under the Extended Fund Facility Arrangement with Sri Lanka
Washington-based International Monetary Fund has approved the release of a 334 million dollars tranche under Sri Lanka’s program, urging continued reforms, tax collections and better state energy pricing.
In both the 2009 (in 2012) and 2016 (in 2018) programs, Sri Lanka has missed reserve targets after inflationary open market operations to cut rates as private credit recovered strongly and more energy SoE losses following currency collapses.
“However, the recovery is expected to continue in 2025,” Deputy Managing Director Kenji Okamura said in a statement.
The IMF Executive Board completed the Third Review under the 48-month Extended Fund Facility with Sri Lanka, providing the country with immediate access to SDR 254 million (about US $334 million) to support its economic policies and reforms.
Performance under the program has been strong. All quantitative targets for end-December 2024 were met, except the indicative target on social spending. Most structural benchmarks due by end-January 2025 were either met or implemented with delay. The recent successful completion of the bond exchange is a major milestone towards restoring debt sustainability.
Reform efforts are bearing fruit with the recovery gaining momentum. As the economy is still vulnerable, sustaining the reform agenda is critical to put the economy on a path towards lasting recovery and debt sustainability.
“As the economy is still vulnerable, it is critical to sustain the reform momentum to ensure macroeconomic stability and debt sustainability and promote long-term inclusive growth.
“There is no room for policy errors.”
The IMF urged Sri Lanka to keep the momentum on collecting taxes.
“Boosting tax compliance and refraining from tax exemptions are key to maintaining support for economic reforms,” the agency said.
“Going forward, social support needs to be well-targeted towards the most disadvantaged so as to promote inclusive growth with limited fiscal space.
“Restoring cost-recovery electricity pricing without delay is needed to contain fiscal risks from state-owned enterprises.”
Sri Lanka should wrap up agreements with remaining bilateral creditors and monetary policy should focus on price stability, the statement said.
“Monetary policy should prioritize maintaining price stability, supported by sustained commitment to prohibit monetary financing and safeguard Central Bank independence,” the IMF said.
There have been concerns by analysts however whether Sri Lanka has a credible monetary operating framework to maintain ‘price stability’ due to a 5 percent inflation target which had created serial currency crises and external default in the past.
There have also been warnings that the inflation target in general conflicts with a foreign reserve collecting requirement under the IMF program as the central bank pushes down rates with inflationary open market operations via an abundant reserve regime, involving ‘monetary financing’ of the private sector credit.
The rising food and energy prices from the falling currency then triggers political instability including during the stabilization crises that follows, discrediting of the IMF program and de-railing or reversal of reforms by a new administration.