IMF sanguine about Lankan growth prospects

• Forecasts 3.7% economic growth for this year, recovering from  2.6% in 2019
• But, stresses need for renewed efforts towards fiscal consolidation to ward off risks from debt hangover 
• SL misses fiscal and reserve targets set for 2019 under EFF supported programme 
• IMF renews calls for new Central Bank law to strengthen its independence 

The International Monetary Fund (IMF) sounded fairly sanguine on the Sri Lankan economy and stated it was recovering from last April’s Eater attacks, supported by the solid performance of the manufacturing sector and a rebound in tourism.

However, the multilateral lender urged authorities for renewed efforts to advance fiscal consolidation.

Concluding a visit ahead of the seventh and final review of the US$ 1.5 billion Extended Fund Facility (EFF), a staff team led by IMF’s Manuela Goretti had met with Sri Lanka’s new administration during January 29- February 7 to discuss its policy agenda. 

IMF expects Sri Lanka’s economic growth to recover to 3.7 percent in 2020 from the estimated 2.6 percent in 2019, assuming that the novel coronavirus outbreak will have limited negative effects on the country’s tourism industry and other economic activities.

Coronavirus which began in China’s Wuhan City has so far claimed over 800 lives and many Chinese cities are in lockdown to prevent the virus spreading further.

China is Sri Lanka’s third largest arrivals market after India and the United Kingdom. If the outbreak prolongs, the impact could be substantial on the tourism trade as Chinese tourists are generally considered as high-spenders.

“The recovery is supported by a solid performance of the manufacturing sector and a rebound in tourism and related services in the second half of the year. “High frequency indicators continue to improve and growth is projected to rebound to 3.7 percent in 2020, on the back of the recovery in tourism, and assuming that the novel coronavirus will have only limited negative effect on tourism arrivals and other economic activities,” Goretti said in a statement. 

 However, the mission highlighted that Sri Lanka had failed to meet its fiscal and external reserve targets as part of the 3-year loan programme. 

“Preliminary data indicate that the primary surplus target under the programme supported by the EFF was missed by a sizable margin in 2019 with a recorded deficit of 0.3 percent of GDP, due to weak revenue performance and expenditure overruns,” Goretti said. 

The IMF forecasts the primary deficit to further widen to 1.9 percent of GDP in 2020 due to newly implemented tax cuts and exemptions, clearance of domestic arrears and back loaded capital spending from 2019. 

“Given risks to debt sustainability and large refinancing needs over the medium term, renewed efforts to advance fiscal consolidation will be essential for macroeconomic stability,” she added. 

The IMF also insisted the new administration to improve efficiency in the public administration and strengthen revenue mobilization to consolidate the budget. 

But the previous administration paid a heavy price at the recently held presidential election by going in the path of pure revenue-based fiscal consolidation path, which took toll on businesses, consumers and the entire economy. 

Meanwhile, Sri Lanka also missed the net international reserve target set for December 2019 by US$ 100 million under the EFF-supported programme amid market pressures after the Presidential election and announced tax cuts. “However, conditions have since stabilized,”Goretti stressed.  “Renewed efforts are needed to rebuild reserve buffers to safeguard resilience to shocks, under a flexible exchange rate. 

Approval of the new Central Bank Law in line with international best practices is a critical step to further strengthen independence and governance of the CBSL and support the adoption of flexible inflation targeting”, she added.  However, the new administration led by the President Gotabaya Rajapaksa has indicated that it is not inclined to push through the draft legislation.