Sri Lanka’s reforms strengthen state finances, says IMF mission Chief
View(s):Sri Lanka’s reform programme aims to strengthen the government finances and reduce the need for future borrowings, thereby contributing to the decline of debt relative to the size of the economy, a top official of the IMF said.
The International Monetary Fund’s (IMF’s) advice on macroeconomic policies is anchored in the analysis of a country’s capacity to finance its policy objectives and service the ensuing debt without unduly large adjustments.
Sri Lanka’s high debt burden and gross financing needs require further revenue-based consolidation, he said pointing out that timely progress in structural reforms, including tax administration and energy pricing, will strengthen the platform for durable consolidation.
To this end, the IMF routinely conducts public and external debt sustainability analyses to better detect, prevent, and resolve potential crises, IMF Sri Lanka Mission Chief Jaewoo Lee told journalists last week in Colombo addressing them through a video conference call from the IMF headquarters in Washington.
The video conference was arranged by the IMF Resident Representative’s office in Colombo to brief journalists on the conclusion of the second review of the Extended Fund Facility (EFF).
The authorities’ reform programme, supported by the EFF, aims to provide a policy anchor for macroeconomic stability and structural reforms, while strengthening external resiliency in a challenging global environment.
Sri Lanka will have to promote revenue-based fiscal consolidation to lower the country’s high public deficit and debt. “This is important to create space for the country’s large social and developmental needs. To support this adjustment, there is a need to broaden the tax base and improve the efficiency of the tax system,” Mr. Jaewoo Lee said.
He emphasised the need of strengthening the management of public expenditure and reform state-owned enterprises such as Sri Lankan Airlines, Ceylon Petroleum Corporation and Ceylon Electricity Board in order to reduce fiscal risks and improve transparency.
The programme also aims to strengthen Sri Lanka’s external position and resilience through buildup of international reserves and structural reforms to enhance competitiveness while promoting transition to inflation targeting, which also envisages enhanced exchange rate flexibility.
Answering a question raised by the Business Times journalist, Mr. Lee noted that Sri Lanka could aim to target a broad inflation range initially due to its susceptibility supply-side shocks while enhancing exchange rate flexibility and strengthening the effectiveness of monetary policy in the transition to an inflation forecast targeting regime.
Sri Lanka is to migrate towards a flexible inflation targeting framework gradually replacing the monetary targeting framework. Inflation will remain in the mid-single digits, around 4-6 per cent this year.
Under this initiative, it has been planned to stabilise inflation in mid single digits over the medium term while supporting economic growth objectives and flexibility in exchange rate management.
A joint effort has been made by the Central Bank and the IMF in developing a structural model base Forecasting and Policy Analysis System to strengthen the monetary policy decision-making process and to support Sri Lanka’s transition to a flexible inflation targeting regime, he disclosed.
In the past, fiscal consolidation in Sri Lanka was mainly implemented through spending cuts, as revenues consistently fell short of targets and kept declining as a share of income.
Breaking from the past, government authorities now aim to implement a well-designed fiscal consolidation based on both expenditure efficiency and revenue increase.
It will enable the government to devote more resources to health, education, infrastructure and other social spending needed to ensure growth, a steady reduction in poverty and continuous improvement in social development indicators.
Mr. Lee noted that the enactment of the new Inland Revenue Act is critical for creating a more transparent, fair and even-handed taxation to shift the source of taxation, including by reducing the excessive number of exemptions which erode the tax base.
The new Act will support fiscal consolidation, make the tax system more efficient and equitable and generate resources for social and development programmes.
Further accumulating international reserves and enhancing exchange rate flexibility will help reduce Sri Lanka’s external vulnerability.
The IMF programme supports transparency measures in publishing lists of tax holidays, exemptions, and rate reductions, as well as non-commercial obligations of state-owned enterprises, for better public understanding of how their taxes are spent.
This in turn can help eliminate ineffective public spending. For example, replacing ill-targeted subsidies with cash transfers for the poor, he said adding that the IMF programme supports ongoing automation efforts to help manage government’s resources more efficiently.
(Bandula)