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Global lender says Sri Lanka’s short-term outlook is challenging, but medium-term prospects are favourable if current macro-financial imbalances can be addressed

The International Monetary Fund (IMF) last week said that while the government seeks to undertake sizable fiscal consolidation and tackle high priority structural reforms, growth momentum can be sustained with a solid commitment to reform, a clear direction on macroeconomic policies, and restoration of market confidence. In the Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on June 3, 2016, following discussions that ended on April 11, 2016, with the officials of Sri Lanka on economic developments and policies, the IMF says that Sri Lanka’s short-term outlook is challenging, but medium-term prospects are favorable if current macro-financial imbalances can be addressed.

“There are significant challenges for 2016 as the government seeks to undertake difficult reforms to re-start fiscal consolidation and tackle high priority structural reforms. Nonetheless, with a solid commitment to reform, clear direction on macroeconomic policies, and restoration of market confidence, there is room for a small uptick in real GDP growth—based on a resumption of investment projects stalled in 2015, continued strong growth in services, and a modest increase in foreign direct investment,” the IMF said.

It noted that real GDP is projected to rise from 4.8 percent in 2015 to 5 percent in 2016, supported by a recovery in construction from negative growth in 2015 (base effects), regaining of GSP plus status, and sustained momentum in services including tourism, transport, and IT.

However, in the medium-term, the IMF projected that growth is expected to increase to 5.5% (in line with estimated potential output) by 2020, and inflation to stabilize at 5 percent. The negative output gap is thus projected to narrow over the medium term and close by 2020.

“This relatively positive outlook is based on several elements, including Sri Lanka’s comparatively buoyant performance during earlier periods of stress (including during the civil war). The outlook is also supported by several macroeconomic pillars,” the IMF said however cautioning that the key risks to the outlook (both short- and medium-term) stem from government inaction on key policies and a significant deterioration in the external environment, as highlighted in the Risk Assessment Matrix (RAM).