INSUBCONTINENT EXCLUSIVE:
Sri Lanka's economy remains vulnerable to adverse shocks and the economy is expected to recover gradually in 2019, while downside risks
remain, the International Monetary Fund said in its staff report released Thursday following the Fifth Review under the Extended Fund
Facility.
Real GDP growth is projected to recover to 3.6 percent in 2019 compared to 4.5 percent at the time of the fourth review in June
2018, driven by agriculture and manufacturing, and to gradually reach 5 percent over the medium term.
"Nevertheless, important downside
risks remain, stemming from a tightening of global financial conditions and weaker external demand, as well as domestic uncertainty after
the recent terrorist attacks and in the run up to the elections," the report said
Inflation is expected to rise to 4.5 percent by end-2019, as economic activity recovers and food prices stabilize, following weather-related
supply disruptions in 2018.
The current account deficit is projected to narrow to 2.8 percent of GDP in 2019, driven by export growth,
supported by the exchange rate correction and recently-signed free trade agreements, and lower oil prices
The IMF report said Sri Lanka's economy remains vulnerable to adverse shocks given the high public debt, large refinancing needs, and low
According to the global lender, a tightening in global financial conditions and capital flow pressures could raise refinancing risks
Trade tensions in key economies, coupled with weaker global growth, could reduce export growth, FDI, and remittances.
"On the domestic
front, political uncertainty in the run up to the elections poses risks to program implementation, while security concerns following the
terrorist attacks might negatively affect tourism and investor sentiment
On the upside, stronger external demand and FDI, an easing of trade tensions and global financial conditions could support growth and
facilitate the adjustment."
Lower energy prices would reduce the current account deficit and support the implementation of energy pricing
The IMF staff recommended that prudent monetary policy by the Central Bank of Sri Lanka should continue, together with greater exchange rate
flexibility, consistent with the roadmap towards flexible inflation targeting.
The lender noted that renewed efforts to improve
transparency, accountability, and cost-efficiency of large state-owned enterprises are needed
While the implementation of the fuel pricing reform has been a major step to mitigate fiscal risks from Ceylon Petroleum Corporation, the
authorities should move forward with plans to bring SriLankan Airlines on a sound commercial and financial footing and complete energy
pricing reforms to address remaining risks from SOEs, the IMF staff recommended.
Sri Lanka has requested the IMF to extend the EFF
arrangement by one year to allow for adequate time to complete the government's reform agenda, and accordingly, the EFF arrangement has been
extended until June 2, 2020.
