IMF assessment on Lanka warns of impact from drought

IMF assessment on Lanka warns of impact from drought

SAM Report,

Even as it appreciated the Lankan government for strong efforts in implementing  IMF-supported economic reforms, the International Monetary Fund (IMF) Tuesday warned that the prolonged drought in Sri Lanka could raise food and oil imports, with adverse impact on growth, inflation as well as  balance of payment.

The warning came as an IMF team led by Jaewoo Lee who was in the country from 21 February concluded their assessment on Sri Lanka after meeting Lankan government authorities for discussions  on the second review of the Sri Lanka’s economic program that is being supported by a three-year Extended Fund Facility (EFF).

The international lending agency quoting Lee said in a press statement that discussions would continue in Washington in April at the Spring Meetings of the IMF and World Bank and added that the mission had made significant progress toward reaching a staff level agreement with the government on completion of the second review.

The visiting IMF delegation had held discussions with Prime Minister, Ranil Wickremesinghe, Finance Minister, Ravi Karunanayake, Governor of the Central Bank of Sri Lanka, Indrajit Coomaraswamy and other government and business representatives.

“Overall, macroeconomic performance in the second half of 2016 was mixed with gradually recovering growth and an uptick in inflation due to the impact of drought and the VAT increase, the IMF further said in its press communiqué  published in its website referring to the Value Added Tax which  the government  last year increased  from 11 percent to 15 percent, resulting in a skyrocketing of prices of essential goods.

“The current account remained stable, but the financial account weakened with the resumption of capital outflows. A more prolonged drought could raise food and oil imports with adverse impact on growth, inflation, and the balance of payment,” the IMF statement added.

It also stated that the mission ‘commends’ the authorities for strong efforts in implementing IMF-supported economic reform program and announced that all fiscal quantitative targets through end-December have been met but said that progress on implementing structural benchmarks was ‘somewhat uneven’ with some of the reforms ‘lagging behind intended timelines.’

Accordingly the mission and government authorities have discussed decisive actions to maintain the reform momentum in light of uncertain external environment as Sri Lanka battles difficult fiscal and monetary conditions.

Mid 2016 the IMF approved a $1.5 billion loan to Sri Lanka, with $168 million disbursed in two  tranches to support the country’s ailing economy.

The loan approved for Sri Lanka in 2016, to be paid in 6 installments, was subject to the Lankan government meeting the IMF’s targets which focuses on restructuring state-owned enterprises by privatisation, slashing subsidies and increasing taxes.

The restructuring pledged by the government includes six of the largest state-owned ventures—the Ceylon Petroleum Corporation (CPC), Ceylon Electricity Board (CEB), Sri Lankan Airlines, National Water Supply and Drainage Board (NWSDB), Airport and Aviation Services, and Sri Lanka Ports Authority. Also in the pipeline is the sale of “non-strategic” assets such as the Colombo Hilton Hotel, Lanka Hospitals, the Hyatt Hotel and Sri Lankan Airlines which the IMF estimates  could earn the government  around $1.5 billion.