IMF silent on post- poll market volatilities, possible risks

• Latest IMF Mission statement says fiscal reforms on track
• GDP growth to pick up to 4.4% in 2018 
• Preaches trade liberalisation and deeper regional integration   
• Mission Chief highlights Sri Lanka’s “sizeable gender gap” 
• Lauds Central Bank for taming excessive money and inflation 

Sri Lanka’s economic growth is set to pick up pace with reforms largely remaining on track, and the authorities should now push for more liberalised factor markets and take steps to close a “sizeable gender gap” for inclusive growth, the International Monetary Fund (IMF) Staff Mission said concluding a two-week long economic health check as part of their Article IV consultation.  

The Mission led by Manuela Goretti said Sri Lanka’s economy is recovering after a series of weather related shocks and the economy is projected to grow 4.4 percent in 2018 and 5.0 percent in the medium term.

The inflation is also estimated to return to 5.0 percent levels as the food prices are seen stabilising, the statement said.  

Sri Lanka’s economy is estimated to have grown by little under 4.0 percent in 2017 after the Central Bank raised interest rates to rein in excessive growth in credit and inflation and the government slapped higher taxes to raise revenue, while the extreme weather wreaked havoc in the main cultivating regions for months destabilising commercial activities and livelihoods. 

The IMF is known for their broadly positive reviews on economies under their programmes, but this statement could be considered one of the softest thus far issued by a Staff Mission on the Sri Lankan economy with very little cautioning on visible risks faced by the economy. 

The statement was completely silent about the political complexities that stem from the recently held local government elections and how the election result could impede some of the key reforms suggested by the multilateral lender.

The IMF, which has been pressing the government hard for cost-reflective pricing formulae for fuel and electricity for years, only said: “Energy pricing reforms are a priority to contain fiscal risks from State Owned Enterprises (SOEs).”

Shiran Fernando, Chief Economist at Ceylon Chamber of Commerce at a recent forum in Colombo cast doubts over the political space available for the government to implement cost-reflective pricing formulae for fuel and electricity following the local government election results. 

Since the shock defeat suffered by the main coalition partners—SLFP and the UNP— in the February 10 local government elections, the coalition government’s position has weakened significantly and the financial and forex markets have remained extremely volatile.    

Overlooking all these developments the Mission statement said reforms have progressed well and fiscal consolidation is advancing pointing to a primary surplus recorded in 2017. 

The Mission also said authorities should push ahead with their mid-term economic policy, ‘Vision2025’ to support Sri Lanka’s rapid and inclusive growth through ambitious structural, macro-economic, and social reforms.

“Key priorities include: (i) advancing fiscal consolidation through revenue mobilisation, a more robust fiscal rule, and stronger SOE governance, (ii) modernizing monetary, financial and exchange rate policy frameworks, and (iii) accelerating growth-enhancing structural reforms”, the statement noted.

Meanwhile, the Mission credited the Central Bank for taming the excessive growth in private sector credit and inflation but said the Monetary Board should stand ready to tighten monetary policy if signs of demand-side inflation pressures or accelerating credit growth appear.

“The CBSL has been effective in curbing credit growth and stabilising inflation despite recent pressures, while stepping up its pace of reserve accumulation”, the Mission said.

The IMF also highlighted the need for the government to gradually liberalise the country’s protectionist trade regime by phasing out tariffs, para-tariffs and non-tariff barriers and adopt a closer regional integration. 

Meanwhile, the IMF said Sri Lanka has a sizable gender gap and called for structural reforms such as labour market reforms and effective gender budgeting, vocational training, flexible work arrangements, safe transportation, and child care support to boost female labour force participation.