Sri Lankan economy gradually recovering – IMF

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Tourist arrivals steadily increasing.

The International Monetary Board has said that the Lankan economy is gradually recovering from the severe impact of the Easter Sunday terrorist attacks.

Tourist arrivals are steadily increasing, after a sharp decline in the aftermath of the April 2019 attacks, thanks to the authorities’ efforts to normalize the security situation, a latest IMF report said.

Nevertheless, the growth slowdown and import contraction have impacted tax revenues and further weakened fiscal performance, which was already being affected by the prolonged impact of the 2018 political crisis, calling for a recalibration of the program targets. IMF also noted that despite recent shocks, the authorities remain committed to prudent policies and structural reforms to support stability and growth.

‘They are taking corrective actions to mitigate the fiscal under performance, while preserving space to support the ongoing recovery and social priorities. The Central Bank maintains a data-dependent monetary policy and remains committed to strengthening reserve buffers, despite recent market pressures, while allowing for greater exchange rate flexibility. The authorities are also advancing critical institutional reforms. In particular, the new Central Bank Act will set the legal foundation for the adoption of flexible inflation targeting, while a stronger fiscal rule and debt management framework will be critical to anchor debt consolidation over the medium term,’ the IMF stated.

It also stated that real GDP growth rebounded to 3.7 per cent (yoy) in 2019Q1, from 1.8 per cent in 2018-Q4, following the resolution of last year’s political crisis.

However, the sharp decline in tourism and related services as well as temporary disruptions in the industrial sector in the wake of the attacks slowed growth to 1.6 per cent (yoy) in 2019-Q2.

While industrial production has since recovered, tourist arrivals year-to-date remain 20 per cent lower as of end-September compared to the same period of 2018, despite a positive trend After falling to 3.4 per cent (yoy) in August, headline inflation rose to 5 per cent in September, driven by weather-related increases in food prices, while core inflation remained stable at 5.6 per cent.

The 3-month moving-average inflation rate stood at 3.9 per cent (yoy), within the inner target band. The current account balance recorded a US$ 448 million surplus in 2019-Q1, driven by a decline in imports of nearly 20 per cent.

However, the fall in tourist arrivals after the attacks and weak remittance inflows, associated with a decline in emigration, turned the current account balance back into a deficit, of US$581 million in 2019 Q2 and US$133 million in 2019-H1, the report said.