For more information, see Sri Lanka and the IMF

The following item is a Letter of Intent of the government of Sri Lanka, which describes the policies that Sri Lanka intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Sri Lanka, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Colombo, Sri Lanka
March 19, 2001

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

1.    The Sri Lankan authorities have held discussions with Fund staff on an economic program that could be supported by a Stand-By Arrangement. Based on these discussions, the attached Memorandum on Economic and Financial Policies (MEFP) discusses the macroeconomic framework for the government's economic program for 2001-02. In support of these policies, the government requests that the Executive Board of the Fund approve a 14-month Stand-By Arrangement in an amount equivalent to SDR 200 million.

2.    The government of Sri Lanka will provide the Fund with such information as the Fund may request in connection with Sri Lanka's progress in implementing the economic and financial policies and achieving the objectives of the program. The government believes that the policies set out in the attached MEFP and Technical Memorandum of Understanding are adequate to achieve the objectives of the program. However, it stands ready to take any additional measures appropriate for this purpose, and will consult with the Fund in accordance with the policies of the Fund on such consultations.

Sincerely yours,

/s/
H.E. Chandrika Bandaranaike Kumaratunga
Minister of Finance
    /s/
Governor A. S. Jayawardena
Central Bank of Sri Lanka

Attachments:
Memorandum on Economic and Financial Policies
Technical Memorandum of Understanding

Sri Lanka—Memorandum on Economic and Financial Policies

I. Background

1.    Real GDP grew at an annual rate of 6 percent in 2000 as output in the manufacturing, in particular the textile industry, and services sectors picked up. Domestic demand, led by the public sector, rose sharply in 2000 and the external current account widened from 3¾ percent of GDP in 1999 to about 7 percent. Merchandise imports expanded by 23 percent, in part because of one off items relating to military hardware. Domestic demand and rising world prices also led to higher inflation which rose from 4 percent (year on year) to 11 percent by end-2000.

2.    The widened savings and investment balance was attributed in large part to increased government spending and bank borrowing by public enterprises, and adverse terms of trade shock. The fiscal deficit worsened by 2½ percentage points of GDP in 2000 to about 10 percent (excluding grants), reflecting increases in security related spending, interest payments, and a revenue shortfall. While the government responded by delaying development spending, domestic borrowing in 2000 rose to 8½ percent of GDP. Several public corporations have been financially hit by the rising world oil price as domestic price adjustments lagged behind. As a result, losses of the state oil, electricity, and transport companies amounted to 2 percent of GDP, compared with ¾ percent of GDP a year earlier.

3.    To finance these shortfalls, bank borrowing by the public sector amounted to more than 140 percent of broad money growth in 2000. As a result, official foreign reserves declined by more than $600 million as the central bank intervened in the foreign exchange market. Import cover declined from 2¼ months at end-1999 to 1¼ months by end-2000. The nominal exchange rate was adjusted in small steps throughout the year and the rupee depreciated by 14½ percent per U.S. dollar. In addition, short-term interest rates were raised as banks became short of liquidity. The reverse repo rate rose from 13 percent at end-1999 to 20 percent at end-2000. By mid-January, the reverse repo rate rose further to 23 percent.

II. Macroeconomic Policies in 2001-02

4.    The principal objectives of the economic and financial policies in 2001 and early 2002 are to regain macroeconomic stability, start reversing the loss in official foreign reserves, while maintaining economic growth at about 4½ percent in 2001. To this end, the government is addressing the fiscal imbalance and the rigidity of the exchange rate regime. Fiscal measures are being introduced in the 2001 budget and domestic prices have been adjusted to eliminate operating losses of public corporations. A flexible exchange rate system was adopted on January 23, 2001 to help preserve the level of official reserves.

Fiscal policy

5.    Fiscal consolidation will be a key component of macroeconomic policies in 2001-02. Under the 2001 budget, the fiscal deficit will be reduced from 10 percent of GDP in 2000 to 8½ percent of GDP, excluding grants (or 8 percent of GDP with grants). An adjustment of more than 2½ percent of GDP will be required, beyond offsetting the increases in interest payments from 5¾ percent of GDP to 6½ percent of GDP (owing to the larger debt stock and higher interest rates) and the larger wage bill as the full impact of wage increases in October 2000 will be realized. In addition, public corporations will repay bank borrowing by about ½ percent of GDP (a turnaround of almost 3 percentage points of GDP from a net borrowing of 2¼ percent of GDP in 2000).

6.    Revenue will be raised by 1½ percent of GDP through several measures to be implemented in March with the announcement of the 2001 budget. These measures include introducing a temporary surcharge of 40 percent on import tariff, except those with tariff rates of zero and two percent (to be removed by 2003 at the latest), raising the National Security Levy (NSL) rate by 1 percentage points to 7½ percent, and imposing a 20 percent surcharge on corporate income tax. In addition, the coverage of Large Taxpayer Unit will be expanded to include the largest GST tax payers. Other administration processes will be strengthened. As a contingency measure, excises on cigarettes would be raised if needed. All new tax incentives approved by the BOI in 2001 would be subject to review in two years, but such reviews would to have to conform to the legislative requirement in Sri Lanka.

7.    On the expenditure side, civil servants will receive no pay rise during 2001, and outlays on other goods and services will be tightly controlled. There will also be a hiring freeze on civil servants. As during 2000, compulsory savings requirement of 5 percent on procurement costs for each ministry will continue to remain in place, and benefits to parliamentarians and ministers will be reduced. Security related spending will be reduced to Rs 63 billion in 2001 implying a reduction of nearly 1¼ percent of GDP. All transactions will be recorded and monitored through the budget, and any overspending of security related expenditure will be offset instantaneously by further measures. In addition to raising excises on cigarettes, consideration would be given to excises on other items, a possible increase in the GST and immediate expenditure cuts on goods and services and domestically financed capital spending.

8.    Specific provision will be made, however, for temporary, targeted, transfers to the very poor to partially offset the impact of the price increases. Savings from improved targeting of the general Samurdhi welfare program will be used to offset some of the increase in the cost. Detailed modalities will be worked out with the assistance of the World Bank. Prompt increase in administered prices (see below) will allow a reduction in subsidies and transfers to public enterprises.

9.    Capital spending will be increased by more than ¾ percent of GDP in line with faster disbursement of foreign financed projects. Priority areas will be health, education, power, and road rehabilitation. In particular, as large foreign-financed infrastructure projects are entering a major construction phase, disbursements are expected to increase. Other rupee-funded projects, however, will be kept to a minimum; the construction of new buildings in particular will be curtailed.

10.    Domestic debt financing of the budget will be reduced in part through increased privatization proceeds. In January, 2001 we received $25 million of privatization receipts for the latest phased the sale of shares in Sri Lanka Airlines to Emirates. The sale of the Co-Operative Wholesale Establishment's wheat operation to Prima is ongoing and we expect the sale of Shell and Telecom shares and the opening of the insurance sector by the fourth quarter of 2001. Altogether receipts are expected to amount to 1¾ percent of GDP or about $275 million. The 2001 budget clearly spells out privatization and restructuring plans for the year, consistent with the envisaged privatization receipts. The quarterly targets for privatization receipts that we envisage under the program appear in Table 1 of the Technical Memorandum of Understanding.

Administered prices

11.    The government has set out a timetable for adjusting administered prices, especially those for oil products, public transportation, and utilities. Increases in oil product prices on December 27 brought the rise in diesel and kerosene prices to about 80 percent since February 2000. Electricity prices were raised in February, 2001. By March 2001, domestic petroleum product price increases will have eliminated operating losses of the Ceylon Petroleum Corporation (based on the WEO scenario of oil prices falling to $25/barrel for 2001). The remaining price increases of fuel oil and diesel are prior actions.

12.    These price adjustments will enable the public corporate sector to repay Rs 7 billion to the banking system (½ percent of GDP). A ceiling has been set on public sector bank borrowing to ensure these corporations adjust their prices as needed for any change in world prices so that operating profit is maintained. To this end, the government will draw up contingent measures including further price adjustments, in consultation with Fund staff to be implemented by midyear, in case the WEO price projections are exceeded. An automatic pricing mechanism will be put in place by end-2001 that will ensure that domestic fuel prices are adjusted sufficiently on a timely basis to pass on changes in international costs, enabling CPC to avoid recourse to bank financing.

Exchange rate and monetary policies

13.    The government adopted a floating exchange rate regime on January 23, 2001. The market response has been favorable and the rate has stabilized at around Rs 86-88 per U.S. dollar. The central bank will no longer announce its daily buying and selling rates within an exchange rate band. The exchange rate will continue to be determined by the demand and supply in the market, with the central bank announcing the weighted average interbank rate on a daily basis. The authorities attach great importance to maintaining the competitiveness of the Sri Lankan economy and strengthening the reserves position. The Central Bank of Sri Lanka (CBSL) remains ready to intervene in a limited manner in the foreign exchange market to dampen extreme volatility, but will not intervene to prevent adjustment of the exchange rate to macroeconomic fundamentals. The Central Bank of Sri Lanka will not have any administrative interference with the market determination of the exchange rate. To prevent commercial banks building large positions, limits have been imposed on net foreign open positions of their working balances. The authorities will consult regularly with the Fund staff on their exchange rate policy.

14.    Monetary policy will need to remain tight until fiscal consolidation can be credibly advanced. A monetary framework will be developed during 2001, with technical assistance from the Fund and Sweden that would be consistent with the floating regime. The aim is to move toward a more explicit inflation objective over the medium term. Meanwhile, to provide a nominal anchor, the growth of reserve money will be limited to below 13 percent, which is consistent with a constant money multiplier and inflation target of 8 percent. Several other indicators of monetary conditions will be closely monitored, including domestic inflation, forward exchange rates and foreign interest rates. Open market operations using treasury bills will be the main monetary policy instrument. Repo and reserve repo rates will also be used to control liquidity condition in the market. High real interest rates are expected to remain in the first half of 2001, given inflation expectations and the need to stabilize the exchange rate. There could be room for some modest interest rate reduction in the latter part of 2001 as fiscal consolidation is advanced.

External targets and policies

15.    Under the fiscal and monetary policy mix, the external current account balance is expected to fall from 7 percent of GDP in 2000 to 3 percent of GDP in 2001. The privatization receipts, net government borrowing of about $130 million, and foreign direct investment close to $190 million, are expected to finance the current account deficit. However, to rebuild the low level of reserves to at least above 2 months imports in 2001, i.e., $1½ billion, and to avoid excessive slowing down of the economy, balance of payments support of $530 million is required. Of this amount, about $200 million is expected to be financed from commercial borrowing (of which $100 million is refinancing of the syndicated loan extended to the Ministry of Finance in 2000), while the remaining amount will be provided by multilateral and bilateral official creditors. Assurances on financial support have been received from the international community, especially the World Bank, the Asian Development Bank, bilateral creditors and the private sector, that would be sufficient to meet financing needs in 2001 and 2002.

16.    To ensure that Sri Lanka maintains its repayments capacity, external commercial borrowing will be limited. Assuming that Sri Lanka's external borrowing in the medium term will be largely on concessional terms, its debt service ratio will remain below 18 percent of exports of goods and services. External public debt will peak around 2001 at 70 percent of GDP and is expected to decline as structural issues are addressed. Short term debt as percent of gross reserves will remain broadly at 50 percent during 2001-02.

III. Medium-term Outlook

17.    The government is publicly committed to building a strong private sector-driven market economy. Such a medium-term strategy requires a macroeconomic policy mix supportive of private sector expansion, through fiscal consolidation, lower real interest rates, and extensive structural reform. The macroeconomic framework could envisage annual growth of 5½-6½ percent, with inflation moderating to below 5 percent. The external current account deficit would decline to below 3 percent of GDP, financed with rising private capital inflows. Official reserves could be brought back to an appropriate level (around 3½ months of import cover) over the medium term which could require additional financing from both official and private sources under a medium term framework.

18.    Fiscal consolidation would lower the overall fiscal deficit to below 5 percent of GDP by 2005. Spending will be in line with the poverty reduction strategy presented to the Development Forum. Transfers to public corporations will be gradually eliminated, and steps will be taken to move the civil service pension scheme on to an actuarially sound basis. The focus of capital spending would be on rural education, health, and infrastructure, with a provision for retrenchment schemes. Domestic financing will be reduced, including from nonbank sources, so as not to inhibit development of a broader capital market.

IV. Structural Issues

19.    Efforts will continue to carry forward structural reform in 2001-02. Public enterprise restructuring will include privatization of commercial activities and administrative restructuring of the Ministry of Finance and the CBSL. Labor market reform will aim to facilitate greater labor mobility while ensuring that adequate social safety net is put in place. A working group on labor market reform will establish standardized formulae for compensation, and establish fixed time limits for approval by the Commissioner of Labor for involuntary employee separation. The social safety net will be dedicated to job counseling, job placement and retraining of displaced workers.

20.    Banking sector soundness has been further improved. Bank supervision has been strengthened and onsite inspection has become more frequent. Most banks meet the risk-weighted capital adequacy ratio of 9 percent, and even though nonperforming loans are still large, adequate provisioning have been made by banks. The government has agreed to participate in the Financial Sector Assessment Program (FSAP) process. Bank of Ceylon's Board members have been replaced by people from the private business community and profits were made in 2000, notwithstanding the fact that full provisioning was made for nonperforming loans. A new restructuring plan is under preparation, including steps to achieve performance targets that will include a reduction in the level of nonperforming loans through enhanced loan evaluation and recovery. This restructuring plan will replace the previous memorandum of understanding, which expires in June 2001.

21.    The People's Bank has a new management team, some from internationally reputable banks, in place since early March. The Bank improved its financial position in the second half of 2000, achieving a break even point in its operations. By September 2001, the new management team will provide a detailed proposal for restructuring that would make the bank commercially viable in the medium term. Measures are being introduced to ensure no operating loss in 2001 even after full provisioning has been made. The government will not provide additional capital until it is satisfied that the proposed restructuring plan is viable and will be implemented. Meanwhile, the bank's 2000 financial statement will be prepared by end-March and an audit completed by end May 2001.

22.    To address the structure of the budget and enhance transparency, dependence on the NSL will be reduced. The changeover will be initiated with the 2002 Budget. There will be a significant reduction of NSL and a compensating increase in GST, with the timing and the amounts to be decided during the September program review. We envisage the full integration of the NSL with the GST by end-2004. Starting with the 2002 budget, no new tax incentives will be provided by the Board of Investment, which will be subsequently eliminated, and the granting and monitoring of all tax preferences will be consolidated to the Inland Revenue Department. In particular, subject to resolution of the legal dispute, the customs regime of BOI and non-BOI importers will be unified under the Customs Department. To promote private sector activity, limits on inward foreign direct investment will be phased out, starting from mid-2001.

V. Program Monitoring and Data Issues

23.    The government is aware that purchases under the stand-by arrangement would be conditioned on the observance of quantitative performance criteria (Table 1) and completion of reviews. There will be three reviews under the program, which will be completed by August 29, 2001, November 29, 2001, and May 14, 2001. The amounts available are proposed to be phased in accordance with Table 1. The monitoring of the program will also take into account indicative targets and structural benchmarks (Table 2). Quantitative performance criteria, indicative targets, and precise definitions of quantitative variables monitored under the program are set out in the attached Technical Memorandum of Understanding. The standard clauses on overdue financial obligations to the Fund, accumulation of external payments arrears, exchange restrictions, multiple currency practices, bilateral payments agreements inconsistent with Article VIII, and import restrictions for balance of payments purposes are also applicable as performance criteria.

24.    We understand that prior actions under the program would have to be implemented at least five days before the Board meeting. We will also transmit to Fund staff all the necessary documentation required under the Fund's safeguard rules, before the Board meeting.

25.    Monitoring the program described in this memorandum will require timely and accurate data, for which a separate arrangement has been made with Fund staff.

Table 1. Performance criteria and Indicative Targets, March 2001-March 2002
(in billions of rupees; unless otherwise indicated)


 
Estimate 2000
end-December
Indicative 2001
end-March
2000
end-June
2001
end-September
2001
end-December
Indicative 1/
2002
end-March

Performance Criteria
 
 
 
 
 
 
Ceiling on banks' net claims on government 2/
147
157
153
158
133
125
Ceiling on net domestic assets of the CBSL 2/
47
47
46
44
12
3
Floor on net international reserves of CBSL 3/ (in millions of U.S. dollars)
45
710
745
810
1,195
1,310
Ceiling on contracting or guaranteeing of new nonconcessional medium- and long-term external debt by the public sector
350
350
350
350
400
Ceiling on the stock of short-term external debt outstanding
150
150
150
150
150
150
Accumulation of external payments arrears
 
 
 
 
 
 
    Continuous performance
    criterion during the program
    period
0
0
0
0
0
0
 
 
 
 
 
 
 
Indicative targets
 
 
 
 
 
 
Floor on central government revenue
 
 
 
 
 
 
    Cumulative from January 1, 2001
211
58
119
190
258
    Cumulative from January 1, 2002
 
 
 
 
 
67
Primary fiscal balance of central government excluding interest payments
 
 
 
 
 
 
    Cumulative from January 1, 2001
-53
-9
-15
-20
-32
    Cumulative from January 1, 2002
-5
Stock of Domestic Debt of the Central Government 4/
661
692
714
740
729
754
Credit to public corporations by the banking system 5/
38
45
50
42
31
30
Ceiling on reserve money of the CBSL
105
111
113
115
120
122

1/ Performance criterion to be set at the time of second review when 2002 budget will be discussed.
2/ Adjusted downward by the full amount of excess rupee equivalent of privatization receipts and upward by shortfall of rupee amount of privatization up to quarterly limits as set out in Table 1 of the TMU; adjusted upward/downward by shortfall/excess.
3/ Adjusted upward by the full amount of excess privatization receipts and downward by shortfall in privatization receipts up to quarterly limits as set out in Table 1 of the TMU; adjusted upward/downward by excess/shortfall of foreign program assistance as set out in Table 2 of the TMU.
4/ Based on the stock of government domestic debt as specifically defined in the TMU.
5/ Based on the stock of credit to public corporations by the banking system.

 

Table 2. Sri Lanka: Prior Actions and Structural Benchmarks

Prior actions
1. Shift to a flexible exchange rate regime Jan. 23, 2001-Done
2. Increase administrative prices of energy and transport fares aimed at eliminating operational loses of public enterprises. In addition to the administered price increases announced already, further price increases will be made on Diesel (by Rs. 3 per liter) and Fuel oils (by Rs. 2 per liter) March 25, 2001
3. Announce revenue and expenditure measures in 2001 budget to achieve program fiscal target, including commitments on privatization and expected receipts. March 8, 2001
Done
Structural benchmarks
1. The new management of People's Bank to prepare a detailed proposal for restructuring to make the bank commercially viable in the medium term. September 2001
2. The new management of Bank of Ceylon to prepare a new restructuring plan which will replace the previous memorandum of understanding. September 2001
3. Bring the GST into the Coverage of the Large Taxpayer Unit (LTU). November 2001
4. Starting with the 2002 budget, all tax concessions to be consolidated into the Inland Revenue Department Act; the Board of Investment will cease to grant new tax incentives. November 2001
5. Reduce dependence on the National Security Levy (NSL) by announcing a significant reduction in the NSL rate and a compensating increase in the GST rate in the 2002 budget. November 2001
6. Start phasing out remaining limits on inward foreign direct investment. December 2001
7. Adopt an automatic petroleum pricing method to permit timely pass through of input costs that would ensure nonrecurrence of operating losses of Ceylon Petroleum Corporation. December 2001

 

Table 3. Sri Lanka: Proposed Schedule of Reviews and Purchases


Date
Amount of Purchase
(in millions of SDRs)
In Percent of
Quota
Conditions

Board approval
103.35
25.0
Approval of Stand-By arrangement.
August 30, 2001
24.16
5.8
Observance of end-June 2001 performance criteria and completion of first review.
November 30, 2001
24.16
5.8
Observance of end-September 2001 performance criteria and completion of second review.
February 28, 2002
24.16
5.8
Observance of end-December 2001 performance criteria.
May 15, 2002
24.16
5.8
Observance of end-March 2002 performance criteria and completion of third review.
Total
200.0
48.4
 

Memorandum item:
Total quota
413.4
100.0
 

 

Technical Memorandum of Understanding on the Program Supported by Stand-By Arrangement

1.    This memorandum sets out the understandings between the Sri Lankan authorities and the Fund relating to the monitoring of the program for 2001-2 supported by the Stand-by Arrangement. It specifies the quantitative performance criteria and indicative targets, and the content and frequency of the data to be provided for monitoring the financial program.

I. Fiscal Targets

A. Performance Criterion on Net Claims on the Government by the Banking System


  Ceiling
(In billions of rupees)

Outstanding stock as of :
      March 31, 2001 (indicative target) 157
      June 30, 2001 (performance criterion) 153
      September 30, 2001 (performance criterion) 158
      December 31, 2001 (performance criterion) 133
      March 31, 2002 (indicative target) 1/ 125

1/ Performance criterion to be set at the time of the Second Review of the arrangement.

 

2.    Net claims on government by the banking system is defined as the difference between banks' claims on government, and the deposits of government, the central and provincial governments with the banking system. The ceiling on net claims on government is cumulative from the start of the fiscal year.

The following adjustments will apply:

3. The ceiling on net claims on government will be adjusted downwards by the full amount of excess rupee equivalent of privatization receipts and upward by shortfall of rupee amount of privatization up to limits as set out in Table 1; adjusted upward/downward by the shortfall/excess of rupee equivalent of foreign program assistance as set out in Table 2. However, the upward adjustment for shortfalls in foreign program financing will be limited to a maximum of $25 million at end-March 2001, $50 million at end-June 2001, $100 million at end-September and $200 million at both end-December 2001 and end-March 2002 as described in Section III below using program exchange rate in Table 4.

4.    The ceiling will be adjusted downward by the full amount of any privatization receipts from residents in rupee equivalent amount using the program exchange rates if receipts are in foreign currency. The same adjusters on net claims to government will also apply to the indicative target on net domestic debt in Table D below.

B. Indicative Target on the Primary Fiscal Balance


  Ceiling
(In billions of rupees)

Cumulative balance from January 1, 2001 to:
      March 31, 2001 (indicative target) -9
      June 30, 2001 (indicative target) -15
      September 30, 2001 (indicative target) -20
      December 31, 2001 (indicative target) -32
Cumulative balance from January 1, 2002 to:
      March 31, 2002 (indicative target) 1/ -5

1/ Indicative target to be set at the time of the Second Review of the arrangement.

 

5.    Government primary fiscal balance is defined as the overall central government fiscal deficit minus interest payments and the ceiling on government primary balance will be monitored according to this definition. For monitoring purposes, primary fiscal balance excludes grants and privatization receipts. The ceiling on government primary balance is cumulative from the start of the fiscal year. However, the government primary balance should also broadly equal the sum of net foreign financing, net bank financing, and non-bank financing as recorded by the Public Debt Department, Central Bank of Sri Lanka, minus interest payments.

C. Indicative Target on the Central Government Revenue


  Floor
(In billions of rupees)

Cumulative balance from January 1, 2001 to:
      March 31, 2001 (indicative target) 58
      June 30, 2001 (indicative target) 119
      September 30, 2001 (indicative target) 190
      December 31, 2001 (indicative target) 258
Cumulative balance from January 1, 2002 to:
      March 31, 2002 (indicative target) 1/ 67

1/ Indicative target to be set at the time of the Second Review of the arrangement.

6.    Central government revenue is defined as the central government revenue as reported in the treasury accounts, and excludes foreign grants and privatization receipts. The floor on central government revenue is cumulative from the start of the fiscal year.

D. Indicative Target on Stock of Net Domestic Debt of the Central Government


  Ceiling
(In billions of rupees)

Stock Balance at the end of:
      March 31, 2001 (indicative target) 692
      June 30, 2001 (indicative target) 714
      September 30, 2001 (indicative target) 740
      December 31, 2001 (indicative target) 729
Stock Balance at the end of:
      March 31, 2002 (indicative target) 1/ 754

1/ Indicative target to be set at the time of the Second Review of the arrangement.

7.    For the purpose of program monitoring, the stock of net domestic debt (NDD) of the central government will be measured by instruments and would be the sum of the stocks of the following government debt instruments less government deposits: (a) Rupee securities, (b) Treasury Bills (c) Treasury Bonds (d) Treasury Certificates of Deposits (e) Provisional advances from the CBSL (f) Other - which consist of overdraft, import bills and syndicated loans with People's Bank and Bank of Ceylon less government deposits with the CBSL, People's Bank and Bank of Ceylon. The reporting requirement for NDD appears in Table 6. The data on the instruments (a) through (d) will be provided by the public debt office and data on (e) and (f) will be based on the balance sheet data of CBSL, People's Bank and Bank of Ceylon as provided by the CBSL. The adjusters to net claims on government will also apply to the indicative target on NDD.

E. Indicative Target on Credit to Public Corporations by the Banking System


  Ceiling
(In billions of rupees)

Outstanding stock as of :
      March 31, 2001 (indicative target) 45
      June 30, 2001 (indicative target) 50
      September 30, 2001 (indicative target) 42
      December 31, 2001 (indicative target) 31
      March 31, 2002 (indicative target) 1/ 30

1/ Indicative target to be set at the time of the Second Review of the arrangement.

8.    Credit to public corporations by the banking system is defined as credit of the banking system to public corporations. It comprise both credit from deposit banking units and from foreign currency banking units. Public enterprises comprise of companies currently classified as public corporations under the CBSL's classification in the monetary survey (Table 3).

II. Monetary Targets

A. Performance Criterion on Net Domestic Assets of the CBSL


  Ceiling
(In billions of rupees)

Outstanding stock as of :
      March 31, 2001 (indicative target) 47
      June 30, 2001 (performance criterion) 46
      September 30, 2001 (performance criterion) 44
      December 31, 2001 (performance criterion) 12
      March 31, 2002 (indicative target) 1/ 3

1/ Performance criterion to be set at the time of the Second Review of the arrangement.

9.    Net domestic assets of the CBSL is defined as the difference between reserve money and net foreign assets of the CBSL valued in rupee. Reserve money is defined below in II.B. Net foreign assets of the CBSL are the net claims on nonresidents, in all currency denominations and government (net). For program monitoring purposes, net foreign assets will be calculated using the exchange rate given in Table 4.

The following adjustments will apply:

10.    The NDA ceiling is based on a baseline path of NFA that excludes reserve losses on forwards (III.A). The NDA ceiling will be adjusted downwards by the full amount of excess rupee equivalent of privatization receipts and upwards by shortfall of rupee amount of privatization up to quarterly limits as set out in Table 1; adjusted upward/downward by the shortfall/excess of rupee equivalent of foreign program assistance as set out in Table 2 using the program exchange rate in Table 4. However, the upward adjustment for shortfalls in foreign program financing will be limited to a maximum of $25 million at end-March 2001, $50 million at end-June 2001, $100 million at end-September and $200 million at both end-December 2001 and end-March 2002 as described in Section III below using program exchange rate in Table 4.

11.    The NDA ceiling will be adjusted downward by the full amount of any privatization receipts from residents in rupee equivalent amount using the program exchange rates if receipts are in foreign currency.

12. Changes in required reserve regulations will modify the NDA ceiling according to the formula:


where denotes the reserve requirement ratio prior to any change; denotes the programmed reserve money base in the period prior to any change; is the change in the reserve requirement ratio; and denotes the immediate change in the reservable base as a result of changes in its definition.

B. Indicative Target on Reserve Money of the CBSL


  Ceiling
(In billions of rupees)

Outstanding stock as of :
      March 31, 2001 (indicative target) 111
      June 30, 2001 (indicative target) 113
      September 30, 2001 (indicative target) 115
      December 31, 2001 (indicative target) 120
      March 31, 2002 (indicative target) 1/ 122

1/ Indicative target to be set at the time of the Second Review of the arrangement.

13.    Reserve money of the CBSL consists of currency in circulation (with banks and with the rest of the public), and financial institutions' deposits at the CBSL, and government agencies deposits (as defined in CBSL's balance sheet in Table 5). As of end-December 2000, reserve money defined in this manner stood at Rs 105 billion (including government agencies deposits which were less than Rs 50 million).

14.    The ceiling on reserve money will be adjusted for changes in reserve regulations in line with the adjustment generated to the NDA limit.

III. External Sector Targets

A. Performance Criterion on Net International Reserves of the CBSL


  Floor
(In millions of U.S. dollars)

Outstanding stock as of :
      March 31, 2001 (indicative target) 710
      June 30, 2001 (performance criterion) 745
      September 30, 2001 (performance criterion) 810
      December 31, 2001 (performance criterion) 1,195
      March 31, 2002 (indicative target) 1/ 1,310

1/ Performance criterion to be set at the time of the Second Review of the arrangement.

15.    Net international reserves of the CBSL is defined as the difference between its gross foreign assets and gross foreign liabilities. Gross foreign assets of the CBSL consists of (i) gold, foreign exchange balances held outside Sri Lanka, foreign securities, foreign bills purchased and discounted, net IMF position and SDR holdings, Crown Agent's credit balance, DSTs' Special Dollar Revolving balance, and (ii) the net forward position, if any, of the CBSL, defined as the difference between the face value of foreign currency denominated CBSL off-balance sheet claims on nonresidents and foreign currency obligations to both residents and nonresidents. Excluded from gross foreign assets will be participation in international financial institutions, holdings of nonconvertible currencies, holdings of precious metals other than gold, and claims on residents (e.g., statutory reserves on foreign deposits of commercial banks) pledged, collateralized or otherwise encumbered assets, claims in foreign exchange arising from derivative transactions (such as futures, forwards, swaps and options). Gross foreign liabilities are all foreign currency denominated liabilities of contracted maturity up to one year, the use of Fund credit, and Asian Clearing Union debit balance.

The following adjustments will apply:

16.    The NIR floor will be adjusted upward by the full amount of excess privatization receipts and downward by shortfall in privatization receipts up to quarterly limits as set out in Table 1; adjusted downward/upward by the shortfall/excess of foreign program financing as set out in Table 2 but the downward adjustment for shortfalls in foreign program financing will be limited to a maximum of $25 million at end-March 2001, $50 million at end-June 2001, $100 million at end-September and $200 million at both end-December 2001 and end-March 2002.

B. Performance Criterion on New Nonconcessional External Debt


  Ceiling
(In millions of U.S. dollars)

Cumulative balance from January 1, 2001 to:
      March 31, 2001 (indicative target) 350
      June 30, 2001 (performance criterion) 350
      September 30, 2001 (performance criterion) 350
      December 31, 2001 (performance criterion) 350
      March 31, 2002 (indicative target) 1/ 400

1/ Performance criterion to be set at the time of the Second Review of the arrangement.

17.    Contracting or guaranteeing of new medium and long-term nonconcessional external debt is defined as contracting or guaranteeing new nonconcessional external debt by the public sector (all central and provincial government ministries and departments, public corporations and institutions, and the CBSL) with an original maturity of more than one year. Non-concessional debt is defined as borrowing containing a grant element of less than 35 percent on the basis of currency-specific discount rates based on the OECD commercial interest reference rates. This performance criterion applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-00/85), August 24, 2000) but also to commitments contracted or guaranteed for which value has not been received. Excluded from this performance criterion are credits extended by the IMF and from the program financing assistance envisaged under the program, including from IBRD and AsDB, and other bilateral creditors as specified in Table 2. Debt contracted with the private sector as part of the program financing assistance will also be subject to this ceiling. Debt falling within the limit shall be valued in U.S. dollars at the exchange rate prevailing at the time of the contract is entered into, or guarantee issued.

C. Performance Criterion on Stock of Short-Term Debt


  Ceiling
(In millions of U.S. dollars)

Cumulative balance from January 1, 2001 to:
      March 31, 2001 (indicative target) 150
      June 30, 2001 (performance criterion) 150
      September 30, 2001 (performance criterion) 150
      December 31, 2001 (performance criterion) 150
      March 31, 2002 (indicative target) 1/ 150

1/ Performance criterion to be set at the time of the Second Review of the arrangement.

18.    Stock of short-term external debt outstanding is defined as debt with original maturity of up to one year owed or guaranteed by the public sector (as defined above). The term debt is defined as set forth in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85), August 24, 2000), but excludes normal import-related credits, forward contracts, swaps, and other future market contracts and short-term liabilities of the banking system. The ceilings also apply to debt instruments with put options that would be triggered within one year after the contracting date.

IV. Data Reporting Requirements

19.    For the purpose of monitoring the fiscal performance under the program, data will be provided in the format as shown in Table 7 and 8:

20.    For the purpose of external sector performance under the program, data will be provided in the format as shown in Table 9 and 10.

21.    All the program monitoring data would be provided by the Ministry of Finance and the Central Bank of Sri Lanka (CBSL). All the data relating to the above programmed targets will be furnished within six weeks after the end of each month.

Table 1. Privatization Receipts and Adjustments 1/
(In millions of U.S. dollars)


 
2001
March
2001
June
2001
September
2001
December
2002
March

Privatization receipts (in millions of U.S. dollars)
Cumulative from January 1, 2001
25
90
90
275
275
Maximum adjustment in the case of shortfall 2/
 
 
 
 
 
      In millions of U.S. dollars
25
50
50
50
50
      In millions of rupees
50,025
100,050
100,050
100,050
100,050

1/Projected privatization receipts from non-residents only.
2/ Full adjustment will be made for any excess of privatization receipts

 

Table 2. Foreign Financing Assumption; Cumulative from January 1, 2001
(In millions of U.S. dollars)


 
2001
March
2001
June
2001
September
2001
December
2002
March

Multilateral creditors
50
69
98
203
247
World Bank
0
0
7
87
117
      Asian Development Bank
33
47
66
88
100
      Others
17
22
25
28
30
      Bilateral creditors
0
11
62
65
76
o/w Japan
0
11
25
25
25
      Germany
0
0
17
20
26
      Others
0
0
20
20
25
Private creditors
0
0
0
200
200
Total
50
80
160
468
523

 

Table 3. List of Public Corporations as Defined by the Central Bank of Sri Lanka 1/


1. Ceylon Electricity Board
2. Ceylon Petroleum Corporation
3. C.W.E.
4. Ceylon Shipping Corporation
5. State Pharmaceuticals Corporation
6. Building Materials Corporation
7. Ceylon Plywood Corporation
8. National Livestock Development Board
1/ Does not include Sri Lanka Telecom, Sri Lankan Airlines—companies in which the state has large equity shares but which are privately operated.

 

Table 4. Exchange Rates and Gold Prices to be Used Under the Program 1/


 
Rupees per Unit of Foreign Currency

U.S. dollar
90
Japanese yen
0.8
SDR
117
EURO
83
Gold prices (U.S. dollars per ounce)
265

1/ Currencies not shown here will be converted first into U.S. dollars using the official rate used by Fund's Treasury Department on January 31, 2001.

 

Table 5. Balance Sheet of the Central Bank of Sri Lanka 1/


Net Foreign Assets
      Foreign assets
            Cash and balance abroad
            Foreign securities
            Claims on ACU
            SDRs
             Foreign currency reserve

      Foreign liabilities
            IMF and nonresident account
            Liabilities to ACU

      Government (net)

Net Domestic Assets
      Claims on government
            Advances
            Treasury bills and bonds
            Cash items in collection
      Government deposits

      Claims on commercial banks
            Medium and long term
            Short term

Other items net

Reserve money
      Currency in circulation
      Commercial bank deposits
      Government agencies deposits


1/ As agreed for the purpose of monitoring the program.

 

Table 6. The Stock of Domestic Debt of Central Government of Sri Lanka 1/


Stock of Total Domestic Debt By Debt Instruments
      Rupee securities
      Treasury Bills
      Treasury Bonds
      Treasury Certificates for Central Bank
      Provisional Advances for Central Bank
      Other liabilities with People's Bank and Bank of Ceylon net of
            government deposits
            Overdraft with People's Bank
            Overdraft with Bank of Ceylon
            Government deposits with CBSL
            Government deposits with Bank of Ceylon
            Government deposits with People's Bank
            Import Bills - Bank of Ceylon
            Imports Bills - People's Bank
            Syndicated Loans with Bank of Ceylon
            Syndicated Loans with People's Bank


1/ As agreed for the purpose of monitoring the program.

 

Table 7. Revenue Collection
(in Rs millions)


Total Revenue

      Tax revenue
            Income taxes; of which
                  Save the Nation Contribution
            Turnover taxes/GST; of which
                  Imports
                  TT on banking and finance
            Excise taxes
                  Liquor
                  Tobacco
                  Other
            National security levy
            Taxes on international trade
            Stamp duty
            License fee/motor vehicles

      Nontax revenue
            Property income
                  CB profits
                  Interest
                  Profits and dividends
                  Rents
            Fees and charges
            Other


 

Table 8. Expenditures
(in Rs millions)


Total expenditure and net lending

      Current expenditure
            Civil service wages and salaries
            Military wages and salaries

            Goods and services
            Subsidies and transfers; of which
                  Pensions
                  Samurdhi
                  Local and provincial governments
            Interest payments
                  Foreign
                  Domestic

            Capital expenditure and net lending
                  Rupee funds (incl. Counterpart funds)
                  Foreign financed

            Overall balance (excl. grants and privatization)

            Overall primary balance (excl. grants and privatization)


 


Table 9. Net International Reserves
(in millions of U.S. dollars)


Date Central Bank

  Government
  Liabilities
 
  Foreign exchange balance. Reserve position with the Fund Forex currency deposit due to SRR 1/ Total Crown Agent's Credit Balance DST's special dollar rev. balance Total Total gross official reserves Deposits Asian Clearing Union PRGF Total

 


1/ Foreign currency deposits held by the CBSL on account of statutory reserve requirement on foreign currency deposits by commercial banks.

 

Table 10. Contracting or Guaranteeing of New Nonconcessional
External Debt by the Public Sector


Creditor Name of project Date of agreement Maturity period Grace period Interest rate Currency Amount Disbursement

 

 


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