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FOR IMMEDIATE RELEASE
August 23, 2010
International Monetary Fund
Washington, D.C. 20431 USA
Statement at the Conclusion of the IMF Staff Mission to Sri Lanka
An International Monetary Fund (IMF) mission led by Dr. Brian Aitken of the Asia and Pacific
Department visited Colombo August 11-23, 2010, to conduct discussions for the fourth
review of the Stand-By Arrangement, approved on July 24, 2009. The mission also held
discussions as part of the Article IV consultation, a regular surveillance exercise that the IMF
undertakes with all its member countries. The mission met with officials from the Central
Bank, the Ministry of Finance and Planning, the Presidential Tax Commission, and other
government ministries and departments, as well as representatives of civil society and the
private sector.
The mission issued the following statement today at the conclusion of its visit:
“Overall economic conditions are improving as expected in the last visit, and the economy is
likely to show strong growth this year. External balances are strong, remittance inflows
continue at a high rate, tourism prospects continue to improve rapidly, and gross reserves
remain at comfortable levels. We assess the central bank’s recent rate cut as appropriate—
with bank lending only slowly beginning to rebound, and economic growth still below
potential, we see little sign of emerging demand-driven inflationary pressures, and average
inflation for the year as a whole is expected to remain in the single digits.
“Performance under the program has been good. End-June performance criteria on domestic
budget borrowing, reserve money, and net reserves have been met. With budget revenues
increasing and expenditure restraint continuing, fiscal performance so far remains consistent
with achieving the government’s full-year deficit target of 8 percent of GDP. Financial sector
reforms continue to go forward in line with the program.
“With the program now back on track, this review is an opportune time to assess Sri Lanka’s
medium-term challenges in the context of the Article IV consultation. Since the last
consultation two years ago a great deal has changed—the end of the 30-year war has led to
a surge in investor enthusiasm, bolstered by the decline in the risk of a short-term balance
of payments crisis—and future growth prospects have improved markedly. Significant nearand medium-term macroeconomic challenges will need to be addressed, however, if Sri
Lanka is to take full advantage of the current favorable environment.
“First, a fundamental tax reform is needed—and planned—to simplify the existing system,
broaden the tax base (including by restricting concessions), spread the tax burden more
equitably, and support economic growth, all while boosting the revenue-to-GDP ratio. The
resulting fiscal space could allow increased public capital spending on reconstruction and
infrastructure as well as social spending to support the vulnerable, but it is clear that the
country’s large investment needs cannot be met through the government budget alone.
Private-sector investment will need to play a critical role. To foster this investment, policies
will need to be geared toward preserving macroeconomic stability, ensuring external
competitiveness, facilitating capital market development, and improving the investment
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climate, all of which would lay the basis for higher sustainable growth in a post-war
environment.
“The authorities’ progress thus far on key policy reforms under the program, albeit with
some delays, is an important step toward meeting Sri Lanka’s medium-term challenges. The
IMF team will now return to Washington to consult with IMF management and will discuss
steps toward planning an Executive Board meeting on the Article IV consultation and the
fourth review under the Stand-By Arrangement.