News Brief No. 02/31

News Brief: IMF Completes Review Under Sri Lanka's Stand-By Arrangement and Approves US$60 Million Disbursement

April 15, 2002

The Executive Board of the International Monetary Fund (IMF) today completed the first and second review of Sri Lanka's economic performance under a 14-month Stand-By Arrangement (see Press Release No. 01/16). This enables the immediate release of a further SDR 48.3 million (about US$60 million) from the arrangement, which would bring total disbursements under the IMF-supported program to SDR 151.7 million (about US$190 million). The Board also approved Sri Lanka's request for extension of the period of the current arrangement by two months to August 19, 2002.

After the Executive Board's discussion on Sri Lanka, Shigemitsu Sugisaki, Deputy Managing Director and Acting Chairman, made the following statement:

"Sri Lanka's program has achieved its immediate goal of halting the precipitous drop in official reserves. In this regard, the authorities' decision in January 2001 to float the exchange rate, while maintaining a tight monetary stance, has proved very effective. Nevertheless, the overall macroeconomic performance under the program has been mixed. A decline in output was principally linked to the external shocks related to the global slowdown, the attack on Colombo airport, the events of September 11, and the drought. However, the growth performance was also affected by the erosion of confidence resulting from the political instability in the second half of the year that led to fiscal policy reversal, an escalation of government debt, and a cessation of structural reform.

"Against this background, the new government faces the challenge of re-establishing conditions for fiscal sustainability and lasting growth. Reining in the fiscal deficit and losses incurred by the state enterprises must be top priorities. The Fund supports the policies enshrined in the new government's 2002 Budget, which, if implemented and backed by prudent monetary policy, will go a long way to address the macroeconomic imbalances. In particular, the Fund welcomes the focus on reform of the tax system and administration, and the steps to rationalize expenditure.

"Another key challenge for the authorities is early implementation of the government's structural reform and poverty reduction agenda, which would lay the foundations for a possible longer-term arrangement under a Poverty Reduction and Growth Facility (PRGF) that would focus on restructuring the state sector, and on areas that are critical for promotion of private sector-led growth. In this vein, the Fund strongly supports the specific steps in the Budget to improve the financial position of the state petroleum and electricity companies through price adjustments, accompanied by early steps to restructure these enterprises with private participation. In addition, the Fund welcomes the further efforts being made to address the weaknesses of the state banks and strengthen bank supervision, and the actions to improve the labor market through timely and consistent resolution of disputes. These efforts will need to be sustained over the medium term.

"Finally, progress on the peace front should significantly improve business confidence, strengthen the willingness of the international community to support reforms in Sri Lanka, and enhance growth and reduce poverty over the medium term," Mr. Sugisaki said.