ECONOMYNEXT – A delegation led by the Director of the International Monetary Fund’s Asia Pacific Department, Krishna Srinivasan is visiting Sri Lanka and discussing the new administration’s reform objectives, an official said.
“Program performance is strong, and reform efforts are bearing fruit in terms of reviving economic growth, lowering inflation, boosting reserves and improving revenue mobilization,” Julie Kozack, Director of the Communications Department said.
“However, as we have said before, important vulnerabilities and uncertainties do remain, and this means that sustaining reform momentum is critical.”
Newly elected President Anura Dissanayake has said Sri Lanka wants to cut both value added tax and income tax according to a statement from his office after meeting IMF officials.
“The delegation is discussing with the authorities the latest economic developments and their economic reform objective,” Kozack said.
“Dates for the Third Review under the EFF will be announced in due course and this delegation will communicate when their visit concludes. And we will have more information for you at that time.”
Sri Lanka’s currency crises increased in frequency after the end of 30-year civil a war, amid aggressive printing of money to target the average weighted call money rate (rate cuts enforced by open market operations) blocking the benefit of a rate corridor in maintaining external stability, denying a peace dividend to the country.
Ratse were cut with inflationary open market operations to either boost inflation to 5 percent or to target potential output (growth), triggering forex shortages and balance of payments deficits.
Sri Lanka borrowed heavily through bonds and syndicated loans, as inflationary OMO triggered BOP deficits, and the country lost the ability repay maturing debt.
Sri Lanka also enacted a law to be able to borrow more in foreign markets over and above the budget deficit, instead of maintaining rates (or allow rates to move within a wide enough corridor) to run deflationary policy and BOP surpluses by squeezing the current account as it is doing now, analysts have said.
Sri Lanka is currently running broadly deflationary policy and triggering BOP surpluses.
Falling prices including in foods have boosted public credibility about the IMF program, unlike in earlier cases, though there are middle class concerns over income tax rates.
Sri Lanka’s macroeconomists cut income tax as well as VAT in late 2019 to close, top of targeting short term rates to close a so-called ‘persistent output gap’, as growth fell from two stabilization crises in 2017 and 2019 in the wake of currency crises from targeting the average weighted call money rate.
Sri Lanka is now planning a ‘single policy rate’.