Colombo [Sri Lanka], September 28 (ANI): Despite early signs of stabilisation, full economic recovery in Sri Lanka is not yet assured, the International Monetary Fund (IMF) said on Wednesday, Colombo Gazette reported.

Growth momentum remains subdued, with real GDP in the second quarter contracting by 3.1 per cent on a year-on-year basis and high-frequency economic indicators continuing to provide mixed signals. Reserve accumulation has also slowed in recent months, the IMF stated.

An IMF mission team led by Peter Breuer and Katsiaryna Svirydzenka visited Colombo from September 14-27, to discuss economic and financial policies to support the approval of the First Review of the program under the EFF arrangement.

At the end of the mission, Breuer and Svirydzenka said in a statement that Sri Lanka has made commendable progress in implementing reforms, but despite early signs of stabilization, full economic recovery is not yet assured.

"The people of Sri Lanka have shown remarkable resilience in the face of enormous challenges. Sri Lanka has made commendable progress in implementing difficult but much-needed reforms. These efforts are bearing fruit as the economy is showing tentative signs of stabilization. Inflation is down from a peak of 70 per cent in September 2022 to below 2 per cent in September 2023, gross international reserves increased by USD 1.5 billion during March-June this year, and shortages of essentials have eased. Despite early signs of stabilization, full economic recovery is not yet assured. Growth momentum remains subdued, with real GDP in the second quarter contracting by 3.1 per cent on a year-on-year basis and high-frequency economic indicators continuing to provide mixed signals. Reserve accumulation has slowed in recent months," the statement read.

The IMF further said that revenue mobilization gains are expected to fall short of initial projections by nearly 15 per cent by year-end, in part due to economic factors.

"Sustaining the reform momentum is critical to put the economy on a path towards lasting recovery and stable and inclusive economic growth. The authorities have met the program's primary balance targets and remain committed to this important pillar of the program so as to support their efforts to restore debt sustainability," the statement added.

However, revenue mobilization gains-while improved relative to last year-are expected to fall short of initial projections by nearly 15 per cent by year-end, in part due to economic factors. The onus of fiscal adjustment would fall on public expenditure if there were no efforts to recoup this shortfall.

"This could weaken the government's ability to provide essential public services and undermine the path to debt sustainability. To increase revenues and signal better governance, it is important to strengthen tax administration, remove tax exemptions, and actively eliminate tax evasion," read the statement.

The lender body stated that it remains important to rebuild external buffers by strong reserves accumulation against continued uncertainty.

"The government has made steady progress on structural reforms. Key legislations passed in Parliament, including the new Central Bank Act and the Anti-Corruption Act, could improve governance if implemented effectively. The IMF Governance Diagnostic report would inform future reform measures to strengthen governance when published. A new welfare benefit payment scheme was enacted with new eligibility criteria that aim to improve targeting, adequacy, and coverage of social safety nets. To ensure financial stability, steps were taken on conducting bank diagnostics, develop a roadmap for addressing banking system capital and liquidity shortfalls, and improve the bank resolution framework," the statement read.

It added that Sri Lanka is restructuring its public debt, Executive Board approval of the first program review requires the completion of financing assurances reviews.

"The authorities have also made headway on regaining debt sustainability through the execution of the domestic debt restructuring and advancing discussions with external creditors. As Sri Lanka is restructuring its public debt which is in arrears, Executive Board approval of the first program review requires the completion of financing assurance reviews. These financing assurances reviews will focus on whether adequate progress has been made with debt restructuring to give confidence that it will be concluded in a timely manner and in line with the program's debt targets," the statementread.

The IMF said that discussions are ongoing, and the authorities are continuing to make progress on their plans for revenue mobilization targets, anti-corruption efforts, and other important structural reforms.

The IMF team held meetings with President and Finance Minister Ranil Wickremesinghe, Central Bank of Sri Lanka Governor P Nandalal Weerasinghe, State Minister Shehan Semasinghe, Chief of Staff to the President Sagala Ratnayaka, Secretary to the Treasury K M Mahinda Siriwardana, and other senior government and CBSL officials, Colombo Gazette reported citing the statement.

The IMF team also met with Parliamentarians, representatives from the private sector, civil society organizations, and development partners.

"We would like to thank the authorities for the excellent collaboration during the mission. The team will continue its discussions in the context of the First Review with the goal of reaching a staff-level agreement in the near term. We reaffirm our commitment to support Sri Lanka at this difficult time," the statement added.

Notably, Sri Lanka underwent its worst economic crisis in history and the foreign exchange reserves fell to a critical low. This also sparked outrage, and people came out on the streets to protest against the government.

Earlier in March, the IMF did approve a 48-month, extended arrangement worth USD 2.9 billion to support Sri Lanka. (ANI)