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    IMF Report on the Second Review Under the EFF with Sri Lanka

    August 10, 2017

    IMF published a report on completion of the second review of economic performance under the Extended Fund Facility (EFF) arrangement with Sri Lanka. Sri Lanka’s three-year extended arrangement was approved on June 03, 2016 in the amount of about USD 1.45 billion, or 185% of quota in the IMF at that time of approval of the arrangement. The government’s reform program, supported by the IMF, aims to reduce the fiscal deficit, rebuild foreign exchange reserves, and introduce a simpler, more equitable tax system to restore macroeconomic stability and promote inclusive growth.

    The staff report highlights that the country’s financial sector has remained sound and resilient amid challenging global and domestic conditions. The capital and liquidity levels of the banking sector were maintained well above statutory minimum requirements. The asset base of the banking system increased by 14.9% in May 2017, driven by expansion in loans and advances, in line with the growth in deposits, while its non-performing loans (NPLs) remained at a healthy level of 2.8%, by the end of May. The performance of the non-bank financial sector improved in terms of asset growth, capital position, profitability and branch network expansion. In the context of few financially distressed finance companies, the Central Bank has already established an enforcement unit to further strengthen the regulatory and supervisory framework.

     

    The report reveals that, commencing from July 01, 2017, licensed commercial banks will adopt Basel III capital standards to strengthen their resilience. This is based on the Direction issued by the Central Bank in late 2016 in line with the Basel III guidelines issued by the Bank for Resettlement (BIS), related to capital, leverage, and liquidity, to strengthen resilience of banks. Licensed banks will meet the increased Basel III minimum capital requirements against risk-weighted assets on a staggered basis, in line with the international timeline for full implementation by January 01, 2019. Going forward, the Central Bank envisages issuing guidelines to banks on Basel III leverage ratio and net funding ratio standards as well, in line with the international timelines. Several amendments are planned to be introduced to the Banking Act to streamline and strengthen the regulatory and supervisory framework for licensed banks in line with the best global standards and practices, taking note of potential business expansion, activities, and innovations in the banking industry.

     

    Related Link: Staff Report (PDF) 

    Keywords: Asia Pacific, Sri Lanka, Banking, Basel III, NPLs, Extended Fund Facility, IMF

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