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Asia and Pacific > Sri Lanka

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Cover IMF Staff Country Reports
Sri Lanka: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Sri Lanka
International Monetary Fund. Asia and Pacific Dept
COVID-19 severely hit the economy, causing a loss of tourism receipts and necessitating several strict lockdowns. Pre-pandemic tax cuts and the impact of COVID-19 led to fiscal deficits larger than 10 percent of GDP in 2020 and 2021 and a rapid increase in public debt to 119 percent of GDP in 2021. Sri Lanka’s access to international capital markets was lost in 2020, prompting a decline of international reserves to critically low levels and large-scale direct lending to the government by the Central Bank of Sri Lanka (CBSL). External debt repayments and a widening current account deficit have led to foreign exchange (FX) shortages, while the official exchange rate has been de facto fixed since April 2021. Inflation is on the rise, reaching double digits in December 2021, reflecting imported inflation, supply shocks, and a pickup in domestic demand amid loose monetary policy.
Keywords:
government intervention; Sri Lankan authorities; CBSL Monetary Law Act; government financing; liability positions vis-à-vis nonresident; COVID-19; Fiscal consolidation; Global
Cover IMF Working Papers
Monetary Policy Transmission in Emerging Markets and Developing Economies
Mr. Luis Brandao Marques, Mr. R. G Gelos, Mr. Thomas Harjes, Ms. Ratna Sahay, and Yi Xue
Central banks in emerging and developing economies (EMDEs) have been modernizing their monetary policy frameworks, often moving toward inflation targeting (IT). However, questions regarding the strength of monetary policy transmission from interest rates to inflation and output have often stalled progress. We conduct a novel empirical analysis using Jordà’s (2005) approach for 40 EMDEs to shed a light on monetary transmission in these countries. We find that interest rate hikes reduce output growth and inflation, once we explicitly account for the behavior of the exchange rate. Having a modern monetary policy framework—adopting IT and independent and transparent central banks—matters more for monetary transmission than financial development.
Keywords:
WP; exchange rate; inflation targeting; interest rate; monetary policy shock; reaction function; monetary policy transmission; exchange rate channel; interest-rate-based monetary policy; interest rate shock; unit monetary policy shock; nominal exchange rate; transmission mechanism; monetary policy rate; dummy variable; IT framework; Financial sector development; Exchange rates; Monetary policy frameworks; Central bank policy rate; Consumer price indexes; Global; Africa; Monetary Policy; Emerging markets; Financial structure; monetary policy framework; monetary policy channel
Cover IMF Working Papers
An Open Economy Quarterly Projection Model for Sri Lanka
Chandranath Amarasekara, Rahul Anand, Kithsiri Ehelepola, Hemantha Ekanayake, Vishuddhi Jayawickrema, Sujeetha Jegajeevan, Csaba Kober, Tharindi Nugawela, Sergey Plotnikov, Adam Remo, Poongothai Venuganan, and Rasika Yatigammana
This study documents a semi-structural model developed for Sri Lanka. This model, extended with a fiscal sector block, is expected to serve as a core forecasting model in the process of the Central Bank of Sri Lanka’s move towards flexible inflation targeting. The model includes a forward-looking endogenous interest rate and foreign exchange rate policy rules allowing for flexible change in policy behavior. It is a gap model that allows for simultaneous identification of business cycle position and long-term equilibrium. The model was first calibrated and then its data-fit was improved using Bayesian estimation technique with relatively tight priors.
Keywords:
WP; monetary policy; exchange rate; Sri Lanka; Quarterly Projection Model; Forecasting and Policy Analysis System; Flexible Inflation Targeting; nominal interest rate; excess demand; rule equation; open economy; inflation expectation; Sri Lankan economy; administered energy inflation; transport inflation; world oil price dynamics; energy inflation; headline inflation; Sri Lankan inflation; Inflation; Exchange rates; Real exchange rates; Inflation targeting; Global
Cover Annual Report on Exchange Arrangements and Exchange Restrictions 2017
Annual Report on Exchange Arrangements and Exchange Restrictions 2017
International Monetary Fund. Monetary and Capital Markets Department

Abstract

The Annual Report on Exchange Arrangements and Exchange Restrictions has been published by the IMF since 1950. It draws on information available to the IMF from a number of sources, including that provided in the course of official staff visits to member countries, and has been prepared in close consultation with national authorities.

Keywords:
AREAER; central bank; floating exchange rate; investment funds; legal tender; foreign exchange; exchange restriction; exchange rate arrangement; monetary policy; spot market; Exchange rate arrangements; Exchange rates; Currencies; Exchange restrictions; Global; West Africa; Eastern Europe; Africa
Cover IMF Staff Country Reports
Sri Lanka: Third Review under the Extended Arrangement under the Extended Fund Facility and Request for Modification of Performance Criterion-Press Release; Staff Report; and Statement by the Executive Director for Sri Lanka
International Monetary Fund. Asia and Pacific Dept
This paper discusses Sri Lanka’s Third Review Under the Extended Arrangement Under the Extended Fund Facility and Request for Modification of Performance Criterion (PC). Performance under the program has remained broadly on track since the second review despite a series of weather-related supply shocks. All end-June and continuous PCs are met. Revenue mobilization has helped meet the quantitative fiscal targets, while strong capital inflows have supported the buildup of international reserves. The budget targets a primary surplus of 1 percent of GDP and frontloads fiscal consolidation toward the authorities’ objective of reducing the overall fiscal deficit to 3.5 percent of GDP by 2020.
Keywords:
ISCR; CR; SDR; disbursement of the equivalent of SDR; monetary policy; discussion of the review; government; Sri Lanka's performance; Sri Lankan authorities; central bank; government assets; Credit; International reserves; Global; Middle East; South Asia
Cover IMF Staff Country Reports
Sri Lanka: Second Review under the Extended Arrangement under the Extended Fund Facility, Request for Waivers of Applicability and Nonobservance of Performance Criterion, and Request for Modification of Performance Criterion-Press Release; Staff Report; and Statement by the Executive Director for Sri Lanka
International Monetary Fund. Asia and Pacific Dept
This paper discusses Sri Lanka’s Second Review under the Extended Arrangement under the Extended Fund Facility, Request for Waivers of Applicability and Nonobservance of Performance Criterion (PC), and Request for Modification of PCs. The authorities remain committed to the economic reform program and undertook meaningful corrective actions where targets were missed. As a prior action, the new Inland Revenue Act will be submitted to Parliament. The authorities have also strengthened tax administration and are conducting a diagnostic review of the value-added tax. The reform momentum should strengthen further, building on the progress made so far.
Keywords:
ISCR; CR; supply disruption; authority; in-kind support; supply; credit growth; food inflation; headline inflation; inflation in June; Credit; International reserves; Exchange rate flexibility; Global; Asia and Pacific; South Asia