IMF to Review Sri Lanka’s Economy Post-Elections amid Ongoing Fiscal Reforms and Political Challenges.

• 5opn1
• November 9, 2024
• Weekly Economic Review
• election, Sri Lanka’s Economy
• 0 Comments

Weekly Economic Review

Following the recent Presidential elections, the state of the economy remains a critical focus for both domestic stakeholders and international bodies. In this context, an IMF mission is scheduled to visit shortly after the P arliamentary elections to assess the country’s economic performance and provide insights for future policy directions.

This mission will conduct a thorough review of the country’s economic situation, including fiscal policies, inflation rates, and growth projections.

The IMF team aims to evaluate the effectiveness of current measures, the stability of the financial system, and the overall macroeconomic environment. The outcomes of this review will play a significant role in shaping the country’s economic trajectory in the coming months, especially in terms of securing financial assistance or adjusting policy frameworks.

The visit underscores the importance of maintaining economic stability and transparency as the country navigates the post-election period, with global financial institutions closely monitoring its progress.

As of October 2024, Sri Lanka’s economy is showing signs of stabilization, with certain sectors experiencing growth. However, the nation continues to face significant challenges, particularly in inflation, poverty, and youth employment.

Economic Stabilization and Growth

Inflation in Colombo registered a negative rate of -0.8% in October 2024, marking the second consecutive month of deflation. This is the first deflationary period since March 1995. Despite this, the World Bank has raised its growth forecast for Sri Lanka to 4.4% for 2024, largely driven by the industrial and tourism sectors, alongside recent policy reforms. However, poverty remains a major issue, with rates expected to stay above 20% until 2026.

Youth and Employment Concerns

Youth employment remains a challenge, with 65% of individuals aged 20-24 not engaged in education and entering the labor market with low skills. Furthermore, high-skilled employment has decreased from 23% in 2018 to 20% in 2023.

Debt Restructuring and IMF Support

Sri Lanka has secured “in-principle” approval from its bilateral creditors for debt restructuring, but full implementation may extend through 2024. The International Monetary Fund (IMF) continues to support Sri Lanka’s recovery, with an IMF delegation set to visit the country on November 14, 2024, to conduct the third review of the nation’s Extended Fund Facility (EFF) program. The IMF’s Director for Asia and the Pacific, Krishna Srinivasan, affirmed that Sri Lanka has made notable progress under the program and emphasized the need to safeguard and build upon these gains.

Tax Reforms and Fiscal Measures

The government has outlined plans for tax reforms, including a reduction in Pay-As-You-Earn (PAYE) tax rates by March 2025, focusing particularly on easing the burden for lower-income earners.

Additionally, the President has proposed the removal of the Value Added Tax (VAT) on certain essential goods and services. These measures are part of the broader fiscal approach aimed at balancing economic growth with public welfare. However, the IMF’s targets for Sri Lanka include increasing government revenue to 15% of GDP by 2025, up from the current 13.8%, and achieving a positive 2.3% primary account balance.

Political Instability and Upcoming Elections

Sri Lanka’s upcoming parliamentary elections in 2024 could lead to political instability, which remains a concern for both domestic and international economic observers. The government is preparing a streamlined cabinet and plans to present a supplementary budget to cover state operations through March 2025, with the full budget expected in February 2025.

Logistical and Cybersecurity Issues

Sri Lanka’s business environment is further challenged by inefficiencies in cargo clearance, which increase costs for both businesses and consumers, undermining global competitiveness. Delays at customs are exacerbated by outdated processes and limited infrastructure, creating opportunities for corruption and higher consumer prices.

Additionally, the country has seen a rise in financial scams, particularly through social media platforms like WhatsApp. The Sri Lanka Computer Emergency Readiness Team (CERT) has issued warnings to the public, advising against sharing personal security codes and urging the use of two-factor authentication for better protection.

Efforts to Combat Money Laundering and Terrorist Financing

In a bid to strengthen financial security, Sri Lanka’s Central Bank has signed a Memorandum of Understanding (MOU) with the National Secretariat for NGOs to facilitate information exchange regarding investigations and prosecutions related to money laundering and terrorist financing activities.

Despite the significant challenges, Sri Lanka’s government remains committed to its IMF-supported program, with both fiscal reforms and structural adjustments planned to stabilize and grow the economy in the coming years.