The IMF said this week that Sri Lanka’s 2011 budget next month would be a key step in embarking on a credible reform strategy, aimed at broadening the tax base, simplifying the tax and tariff systems, and improving tax administration.
The fund’s Executive Board of Directors welcomed the planned legal steps to establish a new investment incentive regime, complementing ongoing reforms to boost competitiveness. Continued efforts to achieve full cost recovery of energy services are also important for fiscal sustainability, it said in a statement after a meeting on Tuesday.
This came after the fund concluded the Article IV consultation with Sri Lanka.
In its assessment, the Executive Directors commended the authorities for their satisfactory program performance, which has helped stabilize the economy and improve Sri Lanka’s near-term growth prospects. The current favourable environment offers a window of opportunity to address remaining macroeconomic challenges and build a strong foundation for private sector-led growth, it said.
“This will require continued fiscal adjustment, a more efficient capital market, and an improved business environment. Growth in the medium term will depend on progress in rebalancing the economy from traditional drivers of growth toward export of services, building on Sri Lanka’s strategic geographical location and comparative advantage in services,” the statement said.
While acknowledging the improvement in fiscal performance, the directors emphasized the need for forceful action to reduce the budget deficit and public debt. In addition to cuts in security-related expenditure, they encouraged the authorities to implement well-sequenced tax reform measures that would create fiscal space for social spending and for much needed reconstruction and infrastructure investment.
The directors commended the Central Bank for bringing inflation under control and endorsed the current monetary policy stance.
Given weak demand pressures and sluggish credit growth, there may be room for further cuts in interest rates, while being watchful for a possible recurrence of inflation.
The directors recommended a gradual move toward a more flexible monetary policy framework that targets inflation more directly, taking into account a wide range of factors, including exchange rate developments and demand conditions.
Greater exchange rate flexibility in both directions would contribute to appropriate adjustment in the event of downward pressure on the exchange rate, while protecting foreign exchange reserves.
They noted that the government’s financial sector reform actions have gone a long way toward addressing past weaknesses.
Further efforts will be needed to put in place a deposit insurance system, establish a regulatory framework for private sector pensions, improve access to bank financing by small- and medium-sized enterprises, and deepen capital markets. In particular, the development of the corporate bond market will be important for increasing the availability of financing for infrastructure investment, it said. |
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