Peter Breuer on Sri Lanka Navigating the Economic Crisis

COLOMBO (News 1st); Peter Breuer, Former Mission Chief of the Asia & Pacific Department at the International Monetary Fund (IMF) pointed out that when the crisis hit, Sri Lanka had the lowest revenue take among emerging market middle-income countries, averaging just above 9% compared to peer countries' average of 26%.

Breuer attributed these outcomes to past policy decisions and insufficient preparation for external shocks, including droughts, political crises, and terrorist attacks between 2017 and 2019.

Further tax cuts and accumulating risks from state-owned enterprises exacerbated the situation, leaving Sri Lanka with thin reserves, high debt, and no fiscal space, said during a panel discussion on the sidelines of the IMF and World Bank Spring Meetings.

The authorities had to suspend external debt service in April 2022, and the fiscal deficit of about 11% to 12% of GDP was financed through monetary means, contributing to inflation surging to 70%, which was particularly harmful to the poor.

A key objective of the IMF program was ambitious revenue-based consolidation, accompanied by fiscal institution reforms, stronger social safety nets, and more robust state-owned enterprises. Breuer emphasized the importance of the authorities' resolve in implementing significant reforms quickly, which yielded commendable results. The economy grew by 5% last year, recovering almost half of the output lost from the peak in 2018 to the lowest point in 2023.

To achieve fiscal consolidation, the program addressed weaknesses related to low tax rates, a narrow tax base, and low collection efficiency.

Capacity development played a critical role in designing these reforms, with approximately 50 missions focused on fiscal areas since mid-2022. Key areas of reform included tax policy, public financial management, and improving tax administration and collections.

Breuer highlighted three important areas: early tax diagnostic missions, sustained capacity development support for public financial management law, and long-term experts stationed at the Ministry of Finance and the Inland Revenue Department. These efforts were crucial in instating principles of fiscal responsibility, better transparency, accountability, and a more efficient budget preparation process.

In summary, the ownership by the authorities, early involvement by capacity development providers, and close collaboration between the authorities, CDE experts, and the IMF program team were key to Sri Lanka's significant economic turnaround.