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Colombo, Sri Lanka

While the fund said the country’s recent economic performance had been positive in a number of respects, it is concerned the fiscal deficit could widen even further and “urgently” advised the government to put public finances on a sustainable path.

The IMF’s recent mission to the country, the findings of which were published today, highlighted the economic and financial risks of a large deficit, and the associated need for borrowing.

It also warned against the challenges faced by all emerging markets at present, reminding Sri Lankan authorities that these internal “imbalances are set against an increasingly less benign external environment” characterised by weak growth and commodity prices.

“Set against such risks, the mission emphasised the urgent need for Sri Lanka to bolster its economic defences.”

Several steps have already been taken, the IMF said, including allowing Sri Lanka’s central bank a greater role in determining the level of exchange and tightening in monetary policy.

The fund welcomed several measures in the budget, including the elimination of special purpose levies, commitments to remove tax exemptions and efforts to bolster the efficiency of tax administration.

It urged Sri Lankan authorities to take a “growth and investment-friendly “approach to reducing the deficit, focusing on measures to broaden the tax base, simplify the tax system and make it fairer and more efficient.