The International Monetary Fund sponsored economic reform program instrumental in the unlocking of US$3 billion for Sri Lanka has compelled the island nation to undergo a deep diagnostic on the issue of governance and corruption as the first country in Asia to do so.
This was emphasized by IMF Asia and Pacific Department Director Krishna Srinivasan when he addressed at an event on Wednesday on May 03 adding that the Sri Lankan government is working on resolving some of these socio economic issues and will “flesh out a strategy.”
The outcome of this diagnosis on governance and corruption issues will feed into the program going forward.
It’s also a program where we have a floor on how the country should support the poor and the vulnerable, he pointed out.
And to make sure that the fiscal support they provide is temporary and targeted to the people who need it most. So it’s a very comprehensive program and the fiscal consolidation by itself will not be enough, he claimed.
The next step for Sri Lanka is to make good faith efforts to reach a debt agreement with their creditors — private creditors, official creditors and so on.
In terms of growth outlook itself, we had a contraction of 8.7 percent 2022. We have growth contracting at 3 percent in 2023 and then making a mild recovery.
But the issue will be for Sri Lanka to implement the program well so that debt can be made sustainable, which is a big difference from previous programs, and the country can be put on the path to prosperity, he disclosed.
Sri Lanka is a country with a quintessential problem where it had a twin deficit, a large increase in the fiscal deficits, putting pressure on the external accounts, reserves falling, and exchange rate falling.
And so the government has approached the IMF for an Extended Fund Facility supported program, which was approved by the Board not too long ago, he revealed.
And that places the emphasis on one macroeconomic stabilization, bringing inflation down. Again, the fiscal consolidation is based on revenue-based consolidation.
That’s partly because Sri Lanka has among the lowest in terms of revenue mobilization, tax collection, and that goes back to the policy mistake they made pre-pandemic, wherein they cut taxes across the board, whether it’s VAT, corporate tax, and personal income tax.
So the Fund supported program is a revenue-based consolidation which provides stability to the economy.
It also wants to rein in inflation, which went through the roof. It addresses governance and corruption issues in Sri Lanka.
Sri Lanka’s inflation has come down, albeit from high levels. So this is again work in progress. Inflation has to come down durably because, inflation is the worst kind of tax on the poor, and the poor and the vulnerable are hurting the most.
In order to bring inflation under control in terms of monetary policy with support of fiscal policy, the Central Bank has to bring inflation down to levels which are reasonable.
In terms of debt restructuring, it has to restructure debt of all creditors — private creditors, official creditors, and to some extent, domestic debt, for the simple reason that debt sustainability is quite a big challenge in Sri Lanka.