The International Monetary Fund (IMF) says the 2025 budget needs to be underpinned by appropriate revenue measures and continued spending restraint so as to reach the medium-term primary balance objective of 2.3% of GDP—a key requirement for restoring Sri Lanka’s debt sustainability.
“With Sri Lanka’s knife-edged recovery at a critical juncture, sustaining the reform momentum and ensuring timely implementation of all programme commitments are critical to cement the hard-won economic progress to date and put the economy on a firm footing.
Maintaining macroeconomic stability and restoring debt sustainability require further efforts to raise fiscal revenues,” said IMF Senior Mission Chief for Sri Lanka Peter Breuer.
He made this statement in their End-of-Mission press release, which includes statements of IMF staff teams that convey preliminary findings after a visit to a country.
An IMF mission team led by Breuer visited Sri Lanka from 25 July to 2 August, to discuss recent macroeconomic developments and progress in implementing economic and financial policies under the authorities’ economic reform program supported by the IMF’s Extended Fund Facility (EFF) arrangement.
“The 2025 budget needs to be underpinned by appropriate revenue measures and continued spending restraint so as to reach the medium-term primary balance objective of 2.3% of GDP—a key requirement for restoring Sri Lanka’s debt sustainability.”
He further stated that the planned relaxation of import restrictions on motor vehicles will support revenue mobilisation in 2025.
He said that 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, Breuer said.
He stated that avoiding new tax exemptions will not only reduce corruption risks and fiscal revenue leakages, but also ensure a more predictable and transparent tax system.
Continuing to maintain energy prices at cost-recovery levels is critical to avoid potential fiscal costs, he added.
“Protecting the poor and the vulnerable through improved targeting and better coverage of cash transfers remains critical. Policy slippages could jeopardise the recovery,” he said.
Breuer continued his statement, adding that the “The recent parliamentary approval of two key pieces of legislation—the Public Financial Management Act and the Public Debt Management Act—is a milestone that will improve fiscal discipline and prudent debt management, bolstering transparency and accountability. Developing a holistic debt management strategy and establishing a well-structured and integrated Public Debt Management Office will help lower the government’s financing risks.
Inflation has been well-contained. Monetary policy should remain prudent and prioritise the anchoring of inflation expectations. Maintaining price stability also hinges on safeguarding CBSL’s independence. Continued reserve accumulation and exchange rate flexibility remain key priorities.
The recent amendments to the Banking Act and the related implementing regulations will help safeguard financial stability. To allow the financial sector to contribute to economic growth, the authorities need to ensure the banking sector is adequately capitalised.
The recently formulated National Anti-corruption Agenda, building on the authorities’ earlier governance action plan, is a welcome step. A steadfast implementation of governance reforms outlined in the Governance Diagnostic Report, prioritising near-term commitments under the EFF programme, is critical to addressing corruption risks and promoting a break from past policy missteps. Ensuring an enabling environment for governance reforms is key to bolstering public confidence and facilitating implementation of these important efforts.
The authorities have made commendable progress with putting debt on a path towards sustainability. The execution of the domestic debt restructuring and finalising the agreements with the Official Creditor Committee and China EXIM Bank are major milestones. IMF staff assessed the Joint Working Framework announced at the conclusion of the second round of restricted discussions with the bondholder committee, and have provided this assessment to the authorities and, on their request, the financial advisors of the bondholders. We encourage a swift resolution of the remaining steps to achieve debt sustainability and regain investor confidence. We will continue to support Sri Lanka’s on-going debt restructuring efforts.
Progress in meeting key commitments under the IMF-supported programme will be formally assessed in the context of the third review of the EFF. The timing of the third review will be discussed with the government after the recently announced presidential elections.”