IMF flags off mounting economic imbalances as third tranche hangs in balance

The International Monetary Fund (IMF) yesterday flagged off a number of imbalances in the country’s monetary, fiscal and external sectors and urged some decisive actions by the authorities to accelerate the reforms agreed on state-owned enterprises (SoEs) weighing heavily on public finances. 
The IMF staff team, which concluded its two-week long post-programme review said, the drought and the higher value added tax had increased the inflation levels while the continuous capital outflows had weakened the external position of the island nation.
“A more prolonged drought could raise food and oil imports with adverse impact on growth, inflation, and the balance of payment,” said IMF mission chief Jaewoo Lee, before leaving 
for Washington. 
In view of these risks, Lee urged the Central Bank to remain vigilant of the price pressures and stand ready to tighten the monetary policy if inflation or credit growth does not abate. “In light of mounting external pressures, the mission encourages the CBSL to take stronger actions towards rebuilding international reserves and maintaining exchange rate flexibility. In this regard, the mission and the authorities discussed IMF technical assistance to facilitate transition to flexible inflation targeting 
framework,” Lee said.
On the fiscal front, the staff team commended the government for meeting all its fiscal quantitative targets through end-December but noted that the net international reserves fell short of 
the target. 
Building foreign reserves is one of the main targets of the IMF loan programme, and it even modified the methodology of measuring the reserves in November to better reflect the reserve strength.    
The IMF staff team did not give any clues about the possible release of the third tranche of US $ 119.9 million scheduled for April 20, instead urged the government for some, ‘decisive actions’ to maintain the reform momentum as the progress made on certain structural reforms have been either uneven or lagging behind the agreed time lines.        
SoE reforms are lagging well behind due to them being both politically challenging and unpopular. But pushing for such reforms was atop in the agenda of the staff team. 
“In this regard, finalising and publishing Statements of Corporate Intents for large SoEs is the first necessary step for enhancing transparency and accountability in the reform process,” Lee said. 
Sri Lanka’s coalition government entered into a 3-year, US $ 1.5 billion extended fund facility with the IMF in June 2016 to fend off balance of payment troubles after they ran easy monetary and fiscal policies until such 
became unsustainable. 

The IMF has so far disbursed two out of seven tranches of the US $ 1.5 billion facility approved for Sri Lanka albeit the second one came somewhat late as the government could not pass the Value Added Tax (Amendment) Bill until late October due to technical and legal glitches faced in bringing the bill to parliament. 
It is not clear as to whether the IMF would also delay the third tranche but the discussions will continue in April in Washington D.C. during the Spring Meetings of the IMF and World Bank.