IMF Praises Sri Lanka’s Legislative Reforms, Urges Continued Fiscal Discipline for Sustainable Recovery

August 03, Colombo (LNW): The IMF announced yesterday that the recent Parliamentary approval of two significant pieces of legislation—the Public Financial Management Act and the Public Debt Management Act—will enhance fiscal discipline and prudent debt management, increasing transparency and accountability.

According to the IMF, developing a comprehensive debt management strategy and establishing a well-structured and integrated Public Debt Management Office will reduce the government’s financing risks.

In a statement following their visit to Sri Lanka from July 25 to August 2, 2024, the IMF delegation, led by Senior Mission Chief Peter Breuer, noted that the country’s recovery continues, with real GDP showing three consecutive quarters of expansion and growth accelerating to 5.3 percent year-on-year in the first quarter of 2024.

“The economic reform programme implemented by the Sri Lankan authorities is yielding commendable outcomes,” the statement said.

The delegation observed that inflation remains below the Central Bank of Sri Lanka’s (CBSL) 5 percent target and that domestic borrowing rates have declined. Their visit focused on discussing recent macroeconomic developments and the progress in implementing economic and financial policies under the authorities’ economic reform programme, supported by the IMF’s Extended Fund Facility (EFF) arrangement.

“Fiscal revenue collections increased during the same period. Going forward, these improvements need to translate into better living conditions for all of Sri Lanka’s people,” the statement added.

“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,” the IMF emphasized.

However, the delegation stressed that maintaining macroeconomic stability and restoring debt sustainability require further efforts to raise fiscal revenues.

“The 2025 Budget needs to be underpinned by appropriate revenue measures and continued spending restraint 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,” the statement noted.

The delegation also suggested that tax administration reforms could further improve compliance, including the establishment of a 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. Avoiding new tax exemptions will reduce corruption risks and fiscal revenue leakages, ensuring a more predictable and transparent tax system. 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 essential. Policy slippages could jeopardize the recovery,” the statement concluded.