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IMF warns Sri Lanka further fiscal consolidation needed as US$ 251.4m approved

The International Monetary Fund approved a disbursement of US $251.4 million to Sri Lanka following the completion of the third review of the 3 year Extended Fund Facility arrangement which was set up in June 2016. 

Approving the latest tranche of funds, the IMF warned that further fiscal consolidation was needed given Sri Lanka's high debt burden and weakly performing state owned enterprises. 

The present review was undertaken after an earlier review was postponed by the IMF pending further reforms by the Sri Lankan government. 

“Fiscal performance has been satisfactory and all targets until September were met. The new Inland Revenue Act will make the tax system more efficient and equitable, and generate resources for social and development programs," Mitsuhiro Furusawa, Acting Chair and Deputy Managing Director said. 

"Nevertheless, Sri Lanka’s high debt burden, large gross financing needs, and weak financial performance of state-owned enterprises increases the importance of further fiscal consolidation. Timely progress in structural reforms, including tax administration and energy pricing, will support fiscal consolidation."

“Inflation and credit growth remain on the high side. Maintaining a tightening bias for monetary policy is recommended until clear signs emerge that inflation pressures and credit expansion have subsided. Macro prudential tools should also be used to help rein in credit growth and head off systemic risks. While financial soundness indicators remain stable, financial sector supervision and the AML/CFT regime should be further strengthened."
 
“Along with efforts to deepen the foreign exchange market, it is important to further accumulate reserves and enhance exchange rate flexibility to reduce Sri Lanka’s external vulnerability."