'Sri Lanka's economy remaining vulnerable to downside risks' 

Manuela Goretti

By Hiran H.Senewiratne-May 17, 2019, 8:00 pm

Sri Lanka's economy remains vulnerable to adverse shocks and the economy is expected to recover gradually in 2019, while downside risks remain, the International Monetary Fund Chief for Sri Lanka said.

"Real GDP growth is projected to recover to 3.6 percent in 2019 compared to 4.5 percent at the time of the fourth review in June 2018, driven by agriculture and manufacturing and to gradually reach 5 percent over the medium term, IMF Mission Chief for Sri Lanka Manuela Goretti told the local media from the IMF head office in Washington via a video conference on Thursday. Its staff report was released on the same day following the Fifth Review under the Extended Fund Facility.

"Nevertheless, important downside risks remain, stemming from a tightening of global financial conditions and weaker external demand, as well as domestic uncertainty after the recent terrorist attacks and in the run up to the elections, she said.

She said that inflation is expected to rise to 4.5 percent by end-2019 as economic activity recovers and food prices stabilize, following weather-related supply disruptions in 2018.

The current account deficit is projected to narrow to 2.8 percent of GDP in 2019, driven by export growth, supported by the exchange rate correction and recently-signed free trade agreements and lower oil prices, Goretti said.

According to Goretti, a tightening in global financial conditions and capital flow pressures could raise refinancing risks. Trade tensions in key economies, coupled with weaker global growth, could reduce export growth, FDI and remittances.

"On the domestic front, political uncertainty in the run up to the elections poses risks to program implementation, while security concerns following the terrorist attacks might negatively affect tourism and investor sentiment. On the upside, stronger external demand and FDI, an easing of trade tensions and global financial conditions could support growth and facilitate the adjustment, she said

Lower energy prices would reduce the current account deficit and support the implementation of energy pricing reforms, she said.

'The prudent monetary policy by the Central Bank of Sri Lanka should continue, together with greater exchange rate flexibility, consistent with the road-map towards flexible inflation targeting, Goretti explained.

She added - "The lender noted that renewed efforts to improve transparency, accountability and cost-efficiency of large state-owned enterprises are needed.

'While the implementation of the fuel pricing reform has been a major step to mitigate fiscal risks from Ceylon Petroleum Corporation, the authorities should move forward with plans to bring SriLankan Airlines on a sound commercial and financial footing and complete energy pricing reforms to address remaining risks from SOEs.

'Sri Lanka has requested the IMF to extend the EFF arrangement by one year to allow for adequate time to complete the government's reform agenda, and accordingly, the EFF arrangement has been extended until June 2, 2020.'