IMF warns Sri Lanka’s economic recovery at risk without careful policy management

The International Monetary Fund (IMF) has warned that Sri Lanka’s recovery could be at risk if policy changes are not managed carefully.

During their visit from July 25 to August 2, 2024, IMF staff highlighted that Sri Lanka’s recent economic reforms have led to three quarters of GDP growth, low inflation, higher revenue, and more foreign reserves.

However, they stressed that ongoing progress with reforms is necessary for a stable and widespread economic recovery.

IMF Senior Mission Chief Peter Breuer emphasized that maintaining reform efforts and meeting commitments on time is crucial for continued economic improvement and stability.

“Maintaining macroeconomic stability and restoring debt sustainability require further efforts to raise fiscal revenues,” he pointed out.

He added that the 2025 Budget needs appropriate revenue measures and continued spending restraint to achieve the medium-term primary balance objective of 2.3 percent of GDP, which is key for restoring Sri Lanka’s debt sustainability.

“The planned relaxation of import restrictions on motor vehicles will support revenue mobilization in 2025. Tax administration reforms could further improve compliance, including by establishing a properly functioning VAT refund system for exporters by April 2025. Any proposed measure eroding the fiscal position needs to be offset by compensating measures of high quality,” he stressed.

The Senior Mission Chief highlighted that avoiding new tax exemptions will reduce corruption risks and fiscal revenue leakages, ensuring a more predictable and transparent tax system.

He stated that maintaining energy prices at cost-recovery levels is crucial to avoid potential fiscal costs.

“Protecting the poor and vulnerable through improved targeting and better coverage of cash transfers remains critical. Policy slippages could jeopardize the recovery,” warned the Senior Mission Chief.