Govt. reaches deal with IMF; cost-reflective fuel pricing formula remains key

• IMF and govt. reach staff-level agreement on fourth review
• IMF Board to consider SL’s request complete fourth review subject to Cabinet approval of automatic fuel pricing mechanism
• IMF expects Sri Lankan economy to grow 4% and inflation to remain below 5% this year

The International Monetary Fund yesterday said they reached a staff-level agreement with the Sri Lankan government on the fourth review under the economic reform programme supported by three-year Extended Fund Facility (EFF) arrangement.

“Subject to Cabinet approval of an automatic fuel pricing mechanism—consistent with the EFF-supported programme, the Board is expected to consider Sri Lanka’s request for completion of the fourth review in June 2018,” Manuela Goretti, the IMF Mission Chief for Sri Lanka said.
“The measure would represent a major step towards completing energy pricing reforms in 2018. “

Goretti said the staff-level agreement was reached after constructive discussions with the authorities in Colombo and during the Spring Meetings in Washington DC.

Goretti noted that further efforts are needed to strengthen governance and mitigate fiscal risks from State-Owned Enterprises (SOEs) 
“Progress in implementing the Inland Revenue Act (IRA) and other revenue measures in the 2018 budget remains essential for meeting social goals and improving debt dynamics. 

The Central Bank should continue to remain vigilant in guarding against inflationary pressures, while continuing to build reserves and supporting greater exchange rate flexibility.” 

 Goretti stressed that sustaining the reform momentum is critical to strengthen the resilience of the economy to shocks and promoting inclusive and strong growth.

“The authorities should push ahead with their Vision 2025 objectives, by further advancing fiscal consolidation through stronger fiscal rules and SOE governance; modernizing monetary and exchange rate frameworks; accelerating their inclusive growth reform agenda, through trade liberalization, climate, and gender budgeting; as well as better-targeted social protection programmes.”

Meanwhile, IMF expects Sri Lanka’s real GDP growth to reach 4 percent and inflation to remain below 5 percent in 2018. The economy grew only 3.1 percent in 2017, owing to weather related disruptions.

However, a recovery is underway as agriculture has started to rebound and food prices decelerated

Exports are also recovering and the recent sovereign bond issuance was successfully oversubscribed.

However, Goretti said the economy remains vulnerable to adverse shocks, given the still sizable public debt, large refinancing needs, and low external buffers.