Despite a rebound in short-term capital inflows following the end of the conflict, reserves remain low and foreign exchange needs remain acute. The economic growth outlook has deteriorated with growth of around 3 percent expected this year compared to 6 percent in 2008. The financial sector has also been put under increasing stress as the economic slowdown takes its toll.
The end of the conflict further added policy challenges to the authorities. The reconstruction and humanitarian relief efforts are a large undertaking. Significant spending priorities need to be met while debt sustainability is maintained.
Program Summary
Against this background, the Sri Lankan authorities have embarked on a program of economic reform and post-conflict reconstruction. They have requested IMF financial assistance to support their efforts.
The program includes the following key elements
• Fiscal policy: The program aims at reducing the central government budget deficit to 5 percent of GDP by 2011, from a target of 7 percent of GDP this year, in line with the Fiscal Responsibility Act. Revenue increasing measures include broadening the tax base, reducing tax exemptions and improving enforcement, which are coupled with measures to rationalize expenditures. Cuts in military and other expenditures will help make room for post-conflict reconstruction and relief spendings.
• Exchange rate and monetary policy: The program envisions strengthening the country's international reserve position and restoring external viability. Allowing greater exchange rate flexibility is also needed to facilitate external adjustment and ensure export competitiveness.
• Social protection: With 15 percent of the population living below the poverty line and a large number of people in the North and East of the country displaced by the conflict, the program envisions protecting expenditures on social transfers to the country's most vulnerable. Spending on post-conflict humanitarian assistance will be also secured through savings from spending cuts and external financing and grants from multilateral institutions and the donor community.
• Financial system: To build confidence in the local financial system, the program includes measures to strengthen the banking system by improving the current regulatory framework and enhancing bank supervision.
Sri Lanka, which joined the Fund on August 29, 1950, has a quota of SDR 413.4 million (about US$644.4 million).#
IMF on Sri Lanka's economic crisis
Special correspondent - 25-07-2009 11:25 GMT-0000
Sri Lanka has been hit hard by the global economic and financial crisis. After years of reliance on short-term financing from international markets to cover its fiscal deficit, Sri Lanka experienced a sudden stop of international capital flows as the global crisis hit. The central bank's initial efforts to keep the exchange rate from depreciating led to a significant loss of reserves.