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IMF Optimistic About Sri Lanka’s Economic Outlook: A Path to Stability and Growth

Sri Lanka finally seems to be coming out of economic crises which had hit the island nation in 2022 leading to a severe political crises destabilising the country.  Signs of revival have been there for past few months and now the International Monetary Fund (IMF) has expressed optimism about the future of Sri Lanka’s economy. The same has also been briefed by Krishna Srinivasan, Director of the Asia and Pacific Department at the IMF, Peter Breuer, Senior Mission Chief for Sri Lanka, and Sarwat Jahan, the IMF Resident Representative in Sri Lanka, who provided insights into the global and regional economic outlook and discussed recently Sri Lanka’s current economic performance, its challenges, and the promising developments in its reform program.

Global and regional outlook

IMF acknowledged that 2023 would be a challenging year for the global economy, with decelerating growth, high inflation, and increased uncertainty due to geopolitical tensions and banking strains. However, it is also acknowledged the Asia Pacific region is projected to contribute around 70 per cent of global growth. The recovery in China and resilient growth in India are expected to be the primary drivers of the region’s economic expansion. Although the IMF cautioned that policymakers in the region cannot afford to be complacent, emphasizing the importance of addressing inflation, financial vulnerabilities, and structural challenges.

IMF’s observations about Sri Lankan economy

Recognizing the severity of Sri Lanka’s crisis, which resulted from past policy missteps and consecutive economic shocks, the IMF expressed deep concern about the impact on the Sri Lankan people, especially vulnerable groups, and the challenges in accessing external financing. To address these pressing issues, the IMF’s Executive Board approved a 48-month Extended Fund Facility (EFF) of approximately $3 billion, providing vital support for Sri Lanka’s economic policies and reforms.

Sri Lanka has already received an initial disbursement of around $330 million from the EFF arrangement, acting as a catalyst for additional external financing from institutions like the Asian Development Bank and the World Bank. Although the country’s economy is projected to contract by 3 per cent in 2023, with modest growth of 1.5 per cent anticipated in 2024, these projections hinge on the successful implementation of the comprehensive economic reform program.

The IMF outlined five key pillars that underpin the reform program supported by the EFF arrangement. Firstly, there is an emphasis on ambitious revenue-based fiscal consolidation, accompanied by the establishment of stronger social safety nets, fiscal institutional reforms, and cost recovery-based energy pricing. These measures aim to ensure the government’s capacity to support essential expenditures while minimizing the impact on the poor.

Secondly, restoring public debt sustainability, including debt restructuring, is essential to ensure stable financing for the government’s operations. Additionally, a multi-pronged strategy is being implemented to restore price stability and rebuild reserves through greater exchange rate flexibility. This approach seeks to alleviate the burden of inflation, particularly for vulnerable segments of society, while fostering an environment conducive to investment and growth.

Furthermore, efforts to safeguard financial sector stability are being pursued to ensure its effectiveness in supporting economic growth. Lastly, priority is given to structural reforms aimed at addressing corruption vulnerabilities and enhancing overall growth.

Sri Lankan economic crises in a nutshell

Sri Lanka faced an unsustainable debt and a severe balance of payments crisis, leading to a negative impact on growth and poverty. In 2022, the country experienced a sharp decline in real GDP, with a projected contraction of 9.2 percent. The uncertain political situation, along with fiscal, external, and financial sector imbalances, added to the economic uncertainty. Inflation remained high despite tightened monetary policy, and poverty levels were projected to remain above 25 per cent.

Key risks included a slow debt restructuring process and limited external financing support. Fiscal consolidation, debt restructuring, and growth-enhancing structural reforms were crucial for restoring sustainable debt levels and regaining access to international financial markets.

International assistance received by Sri Lanka during crisis

During the economic crisis, Sri Lanka received significant international assistance to support the country in its difficult times. The Asian Development Bank (ADB) played a crucial role by repurposing funds from existing projects and providing various forms of support. This included financing for the import of essential items such as medicines, chemicals for water treatment, and fertilizer, as well as assistance for small and medium-sized enterprises and livelihood development in the agriculture sector. ADB also approved an emergency assistance loan of $200 million and administered a $3 million grant from the Japan Fund for Prosperous and Resilient Asia and the Pacific (JFPR) to improve food security and livelihoods, particularly for the poor and vulnerable, with a focus on women and children.

In addition to ADB’s support, other development partners stepped in to assist Sri Lanka. India played a significant role by extending substantial aid, including financial assistance of nearly US$4 billion, food assistance, and currency swaps. Singapore provided a relief package of $100,000 to support humanitarian efforts, while China offered emergency assistance worth 500 million Yuan ($74.2 million). According to news reports from February this year, the Saudi government also pledged continued financial assistance for projects in Sri Lanka.

The way forward

The IMF emphasized the need for continued momentum in implementing the reform program, stressing the importance of strong ownership by the authorities and broad support from the Sri Lankan people. To mitigate the impact of reforms on the poor and vulnerable, the authorities have committed to strengthening social safety nets and establishing objective eligibility criteria.

(Data sourced from: www.worldbank.orgwww.adb.orgwww.imf.org)

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