Sri Lanka and the IMF |
Press Release: IMF Approves US$567 Million in PRGF/EFF Credit Arrangements for Sri Lanka
April 18, 2003
Country's Policy Intentions Documents
of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum
Mr. Horst Köhler
International Monetary Fund
Washington, D.C. 20431
Dear Mr. Köhler:
1. The government of Sri Lanka has adopted an economic program for 2003-2006, which aims to reduce poverty through private-sector led growth. This strategy focuses on creating the conditions for a vibrant private sector and a sound fiscal position, and for helping to establish lasting peace by relief, rehabilitation, and reconstruction (RRR) efforts. Our economic program is set out in the attached Memorandum on Economic and Financial Policies (MEFP), and the Poverty Reduction Strategy Paper (PRSP). In support of this program, we are requesting a three-year PRGF arrangement in the amount of SDR 269 million (65 percent of quota) and concurrently a three-year EFF arrangement in the amount of SDR 144.4 million (35 percent of quota).
2. The government believes that the policies set out in the attached MEFP and the Technical Memorandum of Understanding (TMU) are adequate to achieve the objectives of the program. However, it stands ready to take additional measures appropriate for this purpose, and will consult with the Fund in accordance with the policies of the Fund on such consultations. The government will conduct the first review of the PRGF-EFF arrangements with the Fund no later than September 30, 2003.
3. The government will provide the Fund with all the information in a timely manner as might be requested to monitor progress in implementing policies and achieving the objectives of the PRGF-EFF supported program.
4. Given our balance of payments need, at this stage, we also request an extension of repurchase expectations arising in the period July 2003-June 2004 to the obligations schedule.
Sri Lanka—Memorandum on Economic and Financial Policies for 2003 Under The Three Year Program of the PRGF-EFF Arrangements
I. Introduction and Background
1. Sri Lanka today stands at a pivotal point in its history. After two decades of conflict, the recent progress in the peace process has raised hopes throughout the country that lasting peace may be finally within reach. However, securing lasting peace is inextricably linked with improving economic conditions, and we need to succeed on both fronts if the aspirations of the people of Sri Lanka are to be fulfilled. To this end, we have launched a comprehensive economic reform and poverty reduction strategy (PRS)—Regaining Sri Lanka—with the aim to alleviate poverty by widening opportunities for the poor to benefit fully from accelerated private-sector led growth, eschewing the previous unsustainable policies of "redistribution and transfers."
2. In late 2001, when the present government took office, the country was in the midst of a serious economic crisis. A series of shocks—a global slowdown, an attack on Colombo airport, a severe drought, and policy deficiencies had resulted in severe macroeconomic imbalances (including a runaway fiscal deficit and ballooning public debt) and intense pressures on the exchange rate. To stabilize the economy, the previous government entered into a Stand-by Arrangement (SBA). Although, the SBA met some of its key objectives (stemming reserves losses), the program went seriously off-course, particularly with the marked deterioration in the fiscal accounts. Thus, immediately upon taking office, our priority was to bring the SBA-supported program back on track. This was achieved through several policy and structural reforms—including cutting defense spending, broadening the tax base, and improving tax administration. The final review of the SBA was completed in September 2002.
3. This memorandum describes the medium-term economic program during 2003-2006, in particular the economic and financial policies for 2003. The economic program builds on the reforms initiated under the SBA, and is guided by the objectives and overall strategy laid out in the PRS paper.
II. Medium-Term Framework and Policies
4. Regaining Sri Lanka—our poverty reduction strategy program (PRSP)—identifies several factors that underlie Sri Lanka's high poverty. Chief among these are inadequate growth—reflecting the continued dominance of the public sector in the economy and barriers to productivity growth; unequal opportunities available to the poor—due to geographical isolation and lack of economic integration, limited access to high quality education and basic services, and social exclusion and powerlessness; and the effects of the two-decade long armed conflict. In addition, low labor productivity in agriculture—due to a lack of clear land-tenure rights and continued environmental degradation; barriers to urbanization—particularly due to an over-regulated labor market, which has stifled growth of employment in the formal sector; and problems with governance—especially in the politicization of poverty reduction programs and incomplete decentralization, have also played their part in keeping poverty high.
5. To adequately address these issues, the PRSP contains a broad reform agenda. Within this large agenda, we have reached understandings on the broad areas that will be supported by the Fund, the World Bank, the AsDB, and our bilateral donor partners. Under the PRGF-EFF-supported program, the main focus will be on structural reforms that remove barriers to productivity growth and encourage private-sector led development, restructure the public finances such that scarce resources are freed to redress the lack of opportunities and access of the poor, and provide a stable and enabling macroeconomic environment.
6. While aiming for sustained growth of 8-10 percent in the long run, our medium-term macroeconomic framework envisages growth to average 6½ percent in 2003-06. The higher growth rate will depend on both increased private and public sector investment, as well as enhanced productivity growth. In the absence of major external shocks, a prudent monetary policy should help inflation fall to 5 percent by 2006. Despite an increase in export growth as external conditions improve over the medium term, reconstruction-related imports are likely to raise the current account deficit to an average of 4 percent of GDP. Gross official reserves are targeted to rise modestly to 3½ months of import cover by 2006. Given the projected current account deficit, net capital inflows, and reserve accumulation, we envisage substantial financing gaps during 2003-06 (averaging $400 million per year) that are expected to be filled by donor support.
7. To achieve these objectives, our policies will focus on four areas:
III. The Current Economic Setting
8. The economy is beginning to recover from the downturn in 2001. In 2002, GDP grew by an estimated 3-3½ percent, after declining by 1½ percent the previous year. The rebound in activity was led by recovery in domestic demand and exports of services as progress toward peace revived business and consumer confidence and tourism. Inflation trended down (falling to 9½ percent in 2002 from 14¼ percent in 2001), partly due to increased agricultural supplies from the North and the East. Despite soft commodity exports, reflecting weak external demand, the current account deficit remained broadly unchanged from 2001, as inflows of remittances and tourism receipts strengthened. Gross reserves rose to $1.6 billion (2½ months of import cover), while the rupee remained stable in real effective terms.
9. Fiscal consolidation enabled a steady decline in interest rates. Despite revenue shortfalls—associated with the teething problems in the changes to the tax system (replacement of the goods and services tax (GST) and the national security levy (NSL) with the value-added tax (VAT)), weak tax administration, and continued losses in the Ceylon Electricity Board (CEB), restraint on expenditures enabled the 2002 fiscal deficit to be limited to 8.9 percent of GDP—2 percent of GDP below the deficit in 2001, although more than the budget target of 8½ percent of GDP. The fiscal adjustment and the decline in inflation allowed policy interest rates to be cut by 300 basis points since January 2002, which has aided private sector credit to begin to recover.
10. Significant progress has been made on the reform front:
IV. Macroeconomic Objectives and Policies for 2003
A. Macroeconomic Objectives
11. We expect growth to reach 5½ percent in 2003, underpinned by strengthened consumer confidence and a resumption of delayed private investment projects with the progress toward peace, increase in public investment, higher tourism, and a return to normal weather. Inflation is expected to decline to 7 percent by end-year. The current account deficit is likely to rise to 3¾ percent of GDP, as an export rebound is more than offset by higher imports related to increased activity and reconstruction needs. Gross official reserves are targeted to increase to $1.9 billion (over 2½ months of imports).
B. Post-Conflict Challenges
12. Peace talks with the LTTE have progressed rapidly and the support of the international community has been heartening. However, securing lasting peace also poses challenges for economic policy. Specifically,
C. Fiscal Policy
13. Continued fiscal consolidation remains key to our macroeconomic program. The 2003 budget targets a deficit of 7½ percent of GDP in line with the PRSP, of which ½ percent of GDP is related to post-conflict spending in the North and the East. If concessional foreign assistance becomes available for additional post-conflict spending (which we estimate to be ½ percent of GDP), we plan to incorporate the extra spending through a supplementary budget later in the year.
14. The budget includes several revenue augmenting measures, amounting to ¾ percent of GDP. Among these, we have already extended the VAT to the financial sector at a rate of 10 percent; extended the debits tax from current accounts to include savings accounts; imposed 2-10 percent duty on currently exempt imports; and lifted VAT exemptions on some items. However, we will not be able to extend VAT to the wholesale and retail sectors this year, due to complications arising from the revenue sharing arrangements with provincial councils, particularly in light of the ongoing peace negotiations. We are committed to extending the VAT to these sectors by January 2004, and will work to resolve the outstanding issues by that time. In addition, we are taking measures to ensure that the bottlenecks and procedures with respect to tax administration are cleared for a smooth implementation. To offset the associated revenue loss in 2003, we will impose a levy on the Telecommunication Regulatory Commission (TRC), which will also raise future government revenue. The top income tax rate has been cut from 35 to 30 percent to encourage better tax compliance and investment.
15. In light of the pressures on public finances, expenditure rationalizing measures of around ½ percent of GDP are also included in the budget. These include a continued wage restraint and general hiring freeze of civil servants in 2003 (apart from filling some specific needs for technical, management, education and health personnel), closing of redundant cadre positions; a reduction in defense spending; refinancing (e.g., overdrafts) with long-term bonds; and better targeting Samurdhi program in line with the new Welfare Benefit law. The expenditure measures will not compromise public spending on social priorities. Also, to better track expenditures we will establish a medium-term expenditure framework by July 2003.
16. The government will carefully manage the financing of the budget and limit the use of nonconcessional funds. We will use the delayed privatization receipts for SLIC and the bus companies (slated to be completed last year but now expected in March 2003) to reduce net domestic financing from other sources, while keeping to the privatization plans already envisaged for 2003. Thus, with net external financing expected at 2 percent of GDP, net domestic borrowing will be contained to about 4 percent of GDP (compared with 8 percent of GDP in 2002). This will allow reducing outstanding credit from banking system by 1 percent of GDP. The government will also limit its contracting of new medium- and long-term foreign currency nonconcessional loans to $510 million. Most of this borrowing is related to loans from bilateral donors for projects with grant elements ranging from 20-30 percent. These projects are incorporated into the PRSP and are critical to reducing poverty and reconstructing the economy. We are fully committed to substantially reducing reliance on nonconcessional borrowing in future years, by avoiding excessive external commercial borrowing and working closely with donors to increase the concessionality of bilateral loans.
17. Looking ahead, we plan to continue rationalizing tax exemptions and incentives in the 2004 budget. The existing exemption and incentive regime is outdated and has hindered the much needed broadening of the tax base. In order to better understand the areas and dimensions along which the tax exemptions and incentives need to be rationalized, we will undertake a comprehensive study of the cost and benefits of the current tax regime, including conducting an international comparison of where Sri Lanka stands in this area. While the specific form of rationalizing and targeting of tax incentives and regime will depend on the conclusion of the study, we will consider various options in the 2004 budget, including reducing the number and length of tax holidays, the level and duration of concessional tax rates, stricter limits on roll over of tax holidays; and limiting incentives to strategic sectors.
18. As envisaged in the PRSP, we intend to establish a revenue authority to strengthen tax collection, and provide better service. We have appointed a project manager (the interim chief executive officer) and project team, who are entrusted with setting up of the authority. A workshop is being organized in April in Singapore to provide input to what would be the basis of the Parliamentary Acts governing the operations of the Revenue Authority. By June 2003, we will present to Parliament legislation for establishing the revenue authority and a detailed implementation plan.
19. With regards to quasi-fiscal policy, the key public enterprises (CPC, CWE, and CEB) will limit their bank borrowing. In particular, public corporations are expected to reduce their overall outstanding stock of bank debt by Rs 10 billion in 2003. In the case of CPC, petroleum prices will continue to be set by the existing automatic pricing formula, but to compensate for the removal of the debt recovery component in the formula, the corporation's assets will continue to be sold to pay down its bank debt. However, given the recent increase in international oil prices, since mid-February, the government has subsidized diesel and kerosene prices (at an estimated cost of Rs 300 million per month), compensating CPC directly. These temporary measures were taken to ameliorate the impact of the price increase on the poor, to be fully offset by spending cuts in the Budget. From April onwards, if oil prices continue to remain high, we will protect the budget and pass the full effect of high oil prices on domestic fuel prices. CWE will use proceeds from its asset sales to also draw down its bank debt, while CEB (and its unbundled units) do not intend to increase bank debt during 2003.
D. Exchange Rate and Monetary Policies
20. Our monetary program will be based on a floating exchange rate regime, which has, thus far, served the economy well. In this regard, exchange rate interventions will continue to be limited to smoothing extreme short-term volatility or meeting net international reserves (NIR) target in line with the monetary program. The floating of the exchange rate has provided the CBSL an added instrument to absorb shocks. We are committed to make full use of exchange rate flexibility in responding to both short- and long-term exogenous shocks.
21. Monetary policy will continue to balance the need to support the economic recovery and keep inflation in check. Reserve money will remain the nominal anchor. In line with the anticipated increase in economic activity, broad money growth will be targeted at 13½ percent in 2003. The current levels of interest rates appear broadly appropriate, but we might consider modest easing of rates if the pace of disinflation and fiscal consolidation picks up in the coming months. The CBSL also stands ready to use the existing stock of treasury bills or issue its own paper to sterilize any excess foreign inflows to adhere to the program targets. The CBSL launched formally its active open market operations in March 2003. To help smooth teething problems at the initial phase of active OMOs, a short-term IMF advisor has been stationed at the CBSL.
E. Structural Issues
22. The structural reform agenda for the 2003 program under the PRGF-EFF arrangements will focus on:
Financial Sector Reform
Public Enterprise Reform
Trade and Labor Market Reforms
F. Poverty and Social Impact Analysis and Monitoring
23. We will initiate a poverty and social impact analysis (PSIA) of our key policy reforms in 2003, in collaboration with the World Bank. We recognize that some of the proposed policies that are committed to in this MEFP, such as public sector restructuring, may have short-term costs for the poor. The government is committed to taking countervailing measures, such as voluntary retirement schemes and a possible unemployment protection plan, to ameliorate the impact of policies on the poor. Moreover, working closely with donors, we will update our poverty reduction strategy, after analyzing the household income and expenditure survey, completed by the Department of the Census and Statistics in February 2003.
24. As indicated in our PRSP, we will put in place a monitoring and control framework to track and protect poverty-reduction expenditures. To start with, we have implemented an in-built monitoring system in the Samurdhi program to track improvements in indicators of poverty that will help identify movement of beneficiaries in and out of the program.
G. External Financing
25. The policies described above and our commitments under the PRGF-EFF supported program would help to galvanize donor financing. The estimated financing gap of about $426 million in 2003 is expected to be filled by mostly concessional financing from official creditors. The World Bank has committed $110 million of balance of payments support under the PRSC facility, while the AsDB plans to provide about $60 million through their sectoral loans. Bilateral donors are expected to provide $95 million, including $70 million that has already been committed during the Oslo donors meeting in November 2002. The remainder of the gap ($161 million) is expected to be financed by the PRGF/EFF arrangements.
H. Safeguards and Statistical Issues
26. We remain committed to the financial soundness of the CBSL, adhering to the principles of good governance and best practice as encapsulated in the IMF's safeguards guidelines. In this regard, we will provide the IMF the requested documentation for the PRGF arrangement. Ernst and Young's (New Zealand) will conduct an audit of CBSL's 2002 accounts on a full IAS basis in March 2003.
27. On statistical issues, we plan to migrate our publication of fiscal data in accordance with the GFSM 2001 methodology during 2003 with the help of IMF technical assistance. Sri Lanka is a participant in the GDDS, and we expect full compliance on SDDS by mid-2004.
V. Risks and Contingencies
28. There are risks to the 2003 program and, thus, a need for designing contingency measures.
VI. Program Monitoring and Review
29. To monitor policy implementation under the program, we have reached understandings on the prior action, a set of quantitative performance criteria for end-June and end-December 2003, and a structural performance criterion and benchmarks (Tables 1 and 2). The government intends to bring 90 percent of the shares of SLIC to a point of sale prior to Board consideration of the PRGF-EFF arrangements. There is also a structural performance criterion on the presentation to parliament of the Revenue Authority Act and the preparation of a detailed implementation plan.
30. The government is aware that the first review under the PRGF-EFF arrangements scheduled to be completed by September 30, 2003, would be conditioned on the observance of end-June, 2003 performance criteria. Performance criteria, indicative targets, and precise definitions of quantitative variables monitored under the program are set out in the attached updated Technical Memorandum of Understanding (TMU). 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.
Technical Memorandum of Understanding for the Proposed Program to be Supported by The PRGF-EFF Arrangements
1. This memorandum sets out a framework for monitoring the proposed program for 2003 to be supported by arrangements under the Poverty Reduction and Growth Facility (PRGF) and Enhanced Fund Facility (EFF). It specifies the proposed 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 Domestic Financing of the Central Government Budget
2. Net domestic financing is defined as net credit to the government by the banking system (i.e. CBSL plus deposit money banks) and the net change in holdings of treasury bills and other government securities by the non-bank sector. For the purpose of program monitoring, the flow of net domestic financing (NDF) of the central government budget would be the sum of the net receipts (in book value terms) of the following government debt instruments (a) Rupee securities, (b) Treasury Bills, (c) Treasury Bonds, (d) Treasury Certificates of Deposits, (e) Other rupee-denominated government paper, (f) Provisional advances from the CBSL, (g) and the net change in the stock of debt of other instruments—which consist of overdraft, import bills, syndicated loans with Peoples Bank and Bank of Ceylon less government deposits with the CBSL, People's Bank, and Bank of Ceylon. The reporting requirement for NDF appears in Table 6. The data on the instruments (a) through (e) will be provided by the government's public debt office and data on (f) and (g) will be based on the balance sheet data of Central Bank of Sri Lanka (CBSL), People's Bank, and Bank of Ceylon as provided by the CBSL. For program purposes, foreign-currency denominated loans and bonds issued by the government during the program period and held by residents will be excluded from net domestic financing. Central government is defined here to include line ministries, departments and public institutions.
The following adjustments will apply:
3. The ceiling on net domestic financing will be adjusted upward/downward by the shortfall/excess of rupee equivalent of foreign program financing as set out in Table 2 (memorandum item). However, the upward adjustment for shortfalls in foreign program financing will be limited to the rupee equivalence of $100 million using the program exchange rate in Table 4. Moreover, foreign program financing that increases NIR of the Central Bank of Sri Lanka (CBSL) but does not affect net credit to government (NCG) from the banking system and net domestic financing (NDF) of the budget (such as the DST's Yen Revolving balance), would be excluded from foreign program financing when determining the adjuster for both NCG and NDF.
4. The ceiling on net domestic financing will be adjusted downwards by the full amount of any excess privatization receipts beyond the programmed amounts in Table 1. In case of shortfalls in privatization receipts, the upward adjustment in the ceiling would be limited to 50 percent of the shortfall. Privatization receipts in foreign currency will be converted into rupees using the program exchange rates in Table 4. The same adjusters on changes in net domestic financing of central government will also apply to the indicative target on net claims on government in Table D below.
B. Indicative Target on the Primary Fiscal Balance
5. Government primary fiscal balance is on a cash basis and is defined as the overall central government fiscal deficit minus interest payments. 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's primary balance should also broadly equal the sum of net foreign financing (including grants), net bank financing, and nonbank financing and privatization proceeds as recorded by the Public Debt Department and Economic Research Department, Central Bank of Sri Lanka, minus interest payments. For program purposes, interest payments in the Budget will include interest payments on all government debt (including overdraft).
C. Indicative Target on the Central Government Revenue
6. Central government revenue is defined as the central government revenue as reported in the treasury accounts (economic classification), 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 Net Claims on the Government by the Banking System
7. Net claims on government by the banking system is defined as the difference between banks' claims on government, the deposits of government, and 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 adjusters to net domestic financing will also apply to the indicative target net claims on government. In addition, the foreign currency denominated debt component of net claims on government will be converted to rupees at the programmed exchange rate in Table 4. As for net domestic financing, for program purposes, from January 1, 2003, foreign-currency denominated loans and bonds issued by the government during the program and held by resident banks will be excluded from the net claims on government that is reported in the monetary survey.
E. Indicative Target on Credit to Public Corporations by the Banking System
8. Credit to public corporations by the banking system is defined as credit of the banking system to public corporations. It comprises both credit from deposit banking units and from foreign currency banking units. The foreign currency denominated debt component of credit to public corporations will be converted to rupees at the programmed exchange rate in Table 4. The list of public corporations refers to those companies that are 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
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 Section 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 upward/downward by the shortfall/excess of rupee equivalent of foreign program financing 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 the rupee equivalence of $100 million using the program exchange rate in Table 4. Foreign program financing is as defined in subsection III (A) below. The NDA ceiling will also be adjusted for DST's Special Dollar and Yen Revolving balance that are kept abroad and are included in the program definition of, NIR (see III. A below).
11. The NDA ceiling will be adjusted downward by the full amount of any excess privatization receipts beyond the programmed amounts in Table 1. In case of shortfalls in privatization receipts, the upward adjustment in the ceiling would be limited to 50 percent of the shortfall. Privatization receipts in foreign currency will be converted into rupees using the program exchange rates in Table 4.
12. Changes in required reserve regulations will modify the NDA ceiling according to the formula:
ΔNDA = ΔrB0 + r0ΔB + ΔrΔB
where r0 denotes the reserve requirement ratio prior to any change; B0 denotes the programmed reserve money base in the period prior to any change; Δ r is the change in the reserve requirement ratio; and Δ B 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
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 (only deposits in domestic currency), and government agencies deposits (as defined in CBSL's balance sheet in Table 5). As of end-December 2002, reserve money defined in this manner stood at Rs 126 billion. If any bank fails to meet its legal reserve requirement then reserve money will be adjusted upwards to the extent of any shortfall in compliance with the requirement.
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
15. For the purpose of monitoring the PRGF-EFF program, net international reserves of the CBSL is defined as the difference between its gross foreign assets and liabilities, both expressed in terms of market values. Gross foreign assets of the CBSL consists of monetary gold, foreign exchange balances held outside Sri Lanka, foreign securities (valued in market prices), foreign bills purchased and discounted, net IMF position and SDR holdings, Crown Agent's credit balance, DSTs' Special Dollar and Yen Revolving balance. All foreign currency nondollar denominated reserve balances will be converted into U.S. dollars at programmed exchange rates specified in Table 4 below to reflect valuation adjustment. Excluded from gross foreign assets will be participation in international financial institutions, holdings of nonconvertible currencies, holdings of precious metals other than monetary gold, and claims on residents (e.g., statutory reserves on foreign deposits of commercial banks) pledged, non-liquid, collateralized or otherwise encumbered assets (such as the government's war risk insurance deposit with Lloyds during 2001/02), claims in foreign exchange arising from derivative transactions (such as futures, forwards, swaps and options). Gross foreign liabilities are all foreign currency denominated liabilities, the use of Fund credit, and Asian Clearing Union debit balance and commitments to sell foreign exchange arising from derivatives such as futures, forwards, swaps, and options.
The following adjustments will apply:
16. The NIR floor will be adjusted upward by the full amount of excess privatization receipts in foreign currency compared with the programmed amount in Table 1 and downward by shortfall in privatization receipts in foreign currency, but the downward adjustment will be equal to 50 percent of the shortfall; 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 $100 million for each test date. Foreign program financing is defined to include balance of payments support, including adjustment loans from multilateral creditors other than the Fund, balance of payments support from bilateral creditors, loans from private creditors (including commercial banks) and rescheduling of medium- and long-term public and publicly-guaranteed debt. Thus, foreign program financing as defined above, is expected to augment CBSL's reserves without an immediate expected corresponding payment outflow. For program purposes, from January 1, 2003, foreign-currency denominated loans and bonds issued by the government and held by domestic residents will be treated as foreign program financing.
B. Performance Criterion on New Nonconcessional External Debt
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 non-financial 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 (valued at programmed cross exchange rates as defined in Table 4). The program ceiling of $510 million for 2003 includes a Citibank loan of $100 million and another $270 million of loans that Sri Lanka plans to contract with Japan Bank for International Cooperation (JBIC). Both loans are expected to be contracted by end-March 2003. This debt will also include foreign currency denominated loans and bonds contracted with residents. Nonconcessional 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. For maturities of less than 15 years, the grant element would be calculated based on six-month CIRR averages, while for maturities longer than this, the grant element would be based on ten-year CIRR averages. 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 program financing from IBRD and AsDB, and government counter guarantees on project loans from both IBRD and AsDB, as well as changes in indebtedness resulting from rescheduling operations or rollovers. 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 External Debt
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 non-financial public sector (all central and provincial government ministries and departments, public corporations and institutions, and the CBSL) (valued at programmed cross exchange rates as defined in Table 4). This debt will also include foreign currency denominated loans and bonds contracted by the non-financial public sector with residents. 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. The ceilings also apply to debt instruments with put options that would be triggered within one year after the contracting date.
19. The program's performance criterion on nonaccumulation of external payment arrears is continuous throughout the program period. External payments arrears are defined as overdue payments (interest and principal payments) on short-term debt in convertible currencies with an original maturity of up to and including one year (spot, money market, letters of credit) and medium- and long-term debt contracted or guaranteed by the government. As of end-December 2002, there were no reported external payment arrears.
IV. Structural Conditions
20. The term bringing to the point of sale (MEFP Table 2) means the authorities will have submitted to Cabinet a sale and purchase agreement, including the chosen buyer, final price and other financial and technical understandings by the relevant test date. That agreement will have been endorsed by the Cabinet Appointed Tender Board and approved by the Attorney General. However, since the condition on Sri Lanka Insurance Corporation (SLIC) is a prior action, this implies that submission to the cabinet would have to be done five business days before the Board meeting.
21. Additional specifications of the restructuring of Peoples Bank's March 2004 structural benchmark would be revisited during the first review of the program.
V. Data Reporting Requirements
24. Sri Lanka shall provide the Fund, through reports at intervals or dates requested by the Fund, with such information as the Fund requests in connection with the progress of Sri Lanka in achieving the objectives and policies set forth in the letter. All the program monitoring data would be provided by the Ministry of Finance and the Central Bank of Sri Lanka (CBSL). The data on net domestic financing will be reported to Fund both in terms of net receipts of domestic financing (as in I. A above) and the stock of net domestic debt (as earlier reported). Data on gross foreign assets and gross foreign liabilities would be provided at market prices. All the data relating to the above programmed targets will be furnished within six weeks after the end of each month. For the primary balance, preliminary estimates will be available within six weeks and firmer estimates after 10 weeks.
The NDF target for end-March 2003 assumes that $60 million of the $100 million Citibank loan would be used to repay the government's outstanding import bills at the Bank of Ceylon. In the event that this loan is not disbursed by end-March, 2003, the NDF ceiling for end-March would be adjusted upwards by the rupee equivalent of $60 million using the program exchange rate in Table 4.