Policy Slippages Could Jeopardize Recovery, warns IMF

COLOMBO (News 1st); The International Monetary Fund has warned that policy slippages could jeopardize Sri Lanka's path to recovery.

The IMF staff concluding its visit to Sri Lanka on Friday (2) said the economic reforms implemented by the Sri Lankan authorities have continued to support the recovery with three consecutive quarters of real GDP growth, low inflation, increased revenue collection, and a build-up of external reserves.

It said that decisive progress on the reform agenda is necessary to ensure a broad-based and stable economic recovery benefitting all of Sri Lanka’s people.

An International Monetary Fund (IMF) mission team led by Senior Mission Chief Peter Breuer visited Sri Lanka from July 25 to August 2, 2024.

Breuer said that with Sri Lanka’s knife-edged recovery at a critical juncture, sustaining the reform momentum and ensuring timely implementation of all program commitments are critical to cement the hard-won economic progress to date and put the economy on a firm footing.

"Maintaining macroeconomic stability and restoring debt sustainability require further efforts to raise fiscal revenues," he pointed out.

He further noted that the 2025 Budget needs to be underpinned by appropriate revenue measures and continued spending restraint so as to reach the medium-term primary balance objective of 2.3 percent of GDP—a key requirement for restoring Sri Lanka’s debt sustainability.

"The planned relaxation of import restrictions on motor vehicles will support revenue mobilization in 2025. Tax administration reforms could further improve compliance, including by establishing a properly functioning VAT refund system for exporters by April 2025. Any proposed measure eroding the fiscal position needs to be offset by compensating measures of high quality," he stressed.

The Senior Mission Chief also highlighted that avoiding new tax exemptions will not only reduce corruption risks and fiscal revenue leakages, but also ensure a more predictable and transparent tax system.

He said that continuing to maintain energy prices at cost-recovery levels is critical to avoid potential fiscal costs.

"Protecting the poor and the vulnerable through improved targeting and better coverage of cash transfers remains critical. Policy slippages could jeopardize the recovery," warned the Senior Mission Chief.