ECONOMYNEXT – The International Monetary Fund is waiting for the government to complete some reforms including a Public Financial Management Law to complete a review, Senior Mission Chief Peter Breuer said.
“Some reforms are still ongoing. The public financial management bill is something that we have been engaged with the authorities,” Bruer said.
“So this is, for example, something that we are paying close attention to.”
Most structural benchmarks due before the end of February were either met or implemented with delay, the IMF said.
Sri Lanka has had a frontloaded reform program under an Extended Fund Facility, requiring many laws to be passed, including multiple actions under a corruption diagnostic report.
Passing laws however takes time, government officials have said.
“The authorities are making good progress in implementing the ambitious reform agenda under the EFF with commendable outcomes, including rapid disinflation, robust reserve accumulation, and initial signs of economic growth while preserving the stability of the financial system,” Breur said.
“Public finances have strengthened following substantial fiscal reforms. Program performance overall was strong with all quantitative performance criteria and indicative targets for end-December 2023 met, except for the indicative target on social spending.”
Sri Lanka has to make progress with bond holders and commercial creditors, including sovereign bond holders and China Development Bank “to cementing the path to debt sustainability,” Breuer said.
Sri Lanka’s Treasury Secretary and Central Bank Governor are due to leave to Europe for direct negotiations with bond holders, President Wickremesinghe has said.
He expects debt restructuring work to be completed by June or July 2024 before elections.
The IMF said Sri Lanka’s recovery is on a knife edge and warned against deviating from the program path.
Sri Lanka’s economy usually recovers about 15 to 20 months the central bank triggers a currency crisis by cutting rates with inflationary open market operations through a deeply flawed operational framework involving at least two anchors, analysts have said.
Sri Lanka went into a series of rapid currency crises after the end of a 30-year war with the policy rate, interbank rates and also gilt yields further along the yield curve closely targeted with inflationary open market operations to target potential output, a de facto third anchor, critics have said.
Sri Lanka’s macro-economists cut taxes in the last crisis saying there was a ‘persistent output gap’ after two currency crises in rapid succession from rate cuts killed growth, eventually driving a country at peace into default (Sri Lanka fiscal stimulus to close output gap).
Under the IMF program, tax cuts were reversed and new taxes have been imposed.
Sri Lanka is currently allowing the exchange to appreciate, made possible by deflationary monetary policy, on a path that is unclear, but has helped keep inflation under check.
The country does not have a clean floating exchange rate but collects reserves by intervening in the forex market and sterilizing liquidity.
Sri Lanka still has some trade controls in place and some oil import payments are accumulating. (Colombo/Mar22/2024)
