## cr1803

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### Program overview and status
- Extended arrangement under the Extended Fund Facility (EFF) approved in June 2016 for the amount of SDR 1.07078 billion (185 percent of quota and about US$ 1.5 billion) over 36 months.
- Three purchases equivalent to SDR 359.682 million have been made; another purchase equivalent to SDR 177.774 million will become available upon completion of the third review.
- Performance under the program has remained broadly on track since the second review despite weather-related supply shocks.
- All end-June and continuous performance criteria are met.
- Parliamentary submission of the 2018 budget consistent with the program was set as a prior action for the third review and was completed on November 9.
- The 2018 budget targets a primary surplus of 1 percent of GDP and frontloads fiscal consolidation toward the authorities’ objective of reducing the overall fiscal deficit to 3.5 percent of GDP by 2020.
- The authorities announced a new economic plan titled Vision 2025 in September 2017.

### Recent developments (growth, inflation, external)
- Growth and inflation dominated by weather-related supply shocks in 2017:
  - Real GDP growth pulled down to 3.9 percent (y/y) in 2017H1; services grew modestly and industry expanded strongly (5.8 percent) led by construction, mining and quarry.
  - Headline inflation (y/y) spiked to 7.8 percent in October 2017 due to weather-driven food inflation and the base effect of VAT rate hikes in November 2016; Core inflation declined in October 2017.
- Current account and reserves:
  - Current account deficit widened to 3.5 percent of GDP in 2017H1, driven by weather-related imports of food and fuel.
  - Gross international reserves (GIR) increased from US$6 billion at end-2016 to US$7.3 billion at end-September (3.3 months of imports of goods and services).
  - FX purchases by the central bank were about US$1.6 billion over March–October; sovereign bonds of US$1.5 billion were placed in May.
- Capital inflows and markets:
  - Portfolio inflows strengthened in 2017Q2; some US$700 million flowed into government securities on a net basis over April–September.
  - Treasury bond yields dropped by 250 basis points during March–September 2017.
  - Sri Lanka’s EMBI spread was 330 bps in 2017Q3 and remained stable.
  - Private sector credit growth remained high at 17.5 percent (y/y) in September; staff analysis suggests the credit gap widened to around 7 percent of GDP.
- Reserve coverage and exchange rate:
  - Reserve coverage: 65 percent of the ARA metric and 86 percent of short-term debt at remaining maturity in September 2017.
  - The real effective exchange rate depreciated by 5 percent since end-2016; overvaluation was estimated to exceed 10 percent at end-2016 (CR/17/253).

### Outlook and risks
- Staff baseline projections:
  - Real GDP growth projected to increase from 4.2 percent in 2017 to 4.6 percent in 2018 as agriculture recovers and construction and services remain resilient.
  - Inflation projected to revert to around 5 percent in end-2017 and throughout 2018.
  - Current account deficit projected to shrink from 3 percent of GDP in 2017 to 2.5 percent in 2018.
  - Over the medium term, growth projected to reach about 5 percent (consistent with staff estimate of potential growth).
- Key downside risks:
  - High public debt and large financing needs increase vulnerability to shocks.
  - Fiscal risks: ineffective implementation of the IRA, further delays in SOE reforms, and failure to provide for weather calamities.
  - Financial risks: too slow a deceleration in credit growth could heighten financial sector vulnerability; staff identify upside risks to near-term inflation.
  - External risks: possible reversal of sizeable portfolio inflows could raise domestic borrowing costs when large external payments fall due and could erode reserves if used to defend the currency.
- Debt and financing needs:
  - Public debt (central government debt, guaranteed debt, and Fund credit outstanding) expected to rise slightly to 87 percent of GDP in 2017.
  - Gross financing needs (amortization payments plus overall deficit) projected to reach 20 percent of GDP in 2018.
  - Targeting an overall deficit of 3.5 percent of GDP by 2020 is projected to lower the debt ratio to 81 percent of GDP by 2020 and 75 percent by 2022.
  - SOE liabilities decreased from 13.7 percent of GDP in 2015 to 11.9 percent of GDP in 2016 but remain a major fiscal risk.

### Fiscal policy and budgetary stance
- Authorities pledged to target a primary surplus of 1 percent of GDP in 2018 and primary surpluses of 1 and 2 percent of GDP in 2018 and 2019, respectively.
- Overall deficit target of 3.5 percent of GDP by 2020 is consistent with reaching a primary surplus of 2½ percent of GDP by 2020.
- The 2018 budget revenue package estimated to yield 0.8 percent of GDP, coming mostly from:
  - selected removal of VAT exemptions,
  - changes to excise taxes,
  - new levies on telecom usage and cash transactions by financial institutions.
- The budget accommodates appropriations for natural disaster mitigation programs totaling 0.15 percent of GDP.
- Staff supports the request to modify the primary balance QPC and tax revenue IT for end-2017 to reflect weather calamities; authorities requested lowering the QPC ceiling on primary deficit by Rs 20 billion to Rs 23 billion (0.2 percent of GDP) and the tax revenue IT floor by about 40 billion (0.3 percent of GDP) for end-2017.
- Key fiscal table highlights (selected rows, as provided; Rs Bln % GDP):
  - Total Revenue and Grants: 1,461 13.3; 1,694 14.3; 1,894 14.5; 1,854 14.2
  - Total Expenditure and net lending: 2,229 20.4; 2,334 19.7; 2,581 19.7; 2,597 19.9
  - Overall balance: -768 -7.0; -640 -5.4; -687 -5.2; -742 -5.7
  - Primary balance: -241 -2.2; -29 -0.2; -30.0 -2?; -23 -0.2? (table as provided)
  - Tax revenue (including measures): 1,356 12.4; 1,464 12.4; 1,718 13.1; 1,680 12.9
- Staff urged swift implementation of commitment control by the new integrated IT system (ITMIS), delayed to start in 2019.
- Strengthening public debt management:
  - Draft Liability Management Bill to manage debt maturities and earmark proceeds from commercialization of public assets.
  - Cabinet to approve a strategy for managing international sovereign bonds maturing over 2019–22 (new SB by June 2018).
  - Vision 2025 aims to strengthen the Fiscal Management Responsibility Act with binding targets on fiscal deficit and government debt.

### State-owned enterprises (SOEs) and energy sector
- Weak financial performance of major SOEs in 2017 underscores need for timely reforms.
- Three SOEs closely monitored—CEB, CPC, and SriLankan Airlines—recorded a combined loss of Rs 52 billion in 2017H1 (0.4 percent of GDP) versus a combined profit of 0.2 percent of GDP in 2016.
- Selected SOE figures (Rupees billions; balances include % of annual GDP):
  - Revenue: 1621.2 ; 2602.0 ; 670.5
  - Expenditure: 1961.5 ; 2632.0 ; 800.6
  - Balance: -34 -0.3 ; -40.0 ; -13 -0.1
  - Memorandum item: Outstanding financial obligations, end-2016: 2301.9 ; 3853.3 ; 3172.7
- Energy pricing reform sequence and targets:
  - Report on fuel and electricity NCOs (November 2017).
  - Bulk Supply Transaction Account for electricity by March 2018.
  - Cost-reflective automatic pricing formula: Fuel cabinet decision by March 2018; Electricity cabinet decision by Sept 2018.
  - Second review set a zero new IT (ceiling) on uncompensated cost of fuel and electricity NCOs for 2018 to encourage recognizing quasi-fiscal subsidies as above-the-line spending.
- Annex II: Compensating Fuel and Electricity NCOs—indicative target introduces a zero ceiling on the cost of NCOs (net of government transfers) for CPC and CEB.

### Monetary policy and reserves
- Monetary policy should maintain a tightening bias until inflation and credit growth stabilize; macroprudential measures to be used as needed.
- CBSL kept policy rate unchanged since a 25-bps hike in March 2017; had previously raised policy interest rates by 100 basis points in 2016 and increased SRR by 1.50 percentage points in 2016.
- Near-term inflation faces upside risks from high credit growth, tight labor market, and depreciating rupee.
- Authorities pledged to build up net international reserves by about US$700 million in 2018.
- End-2018 GIR target: US$8.0 billion, equivalent to 67 percent of the ARA metric and 3.4 months of import.
- CBSL plans to further wind down FX swaps (US$1.85 billion at end-September) to improve reserve composition; wind-down framework and gradual reduction of outstanding net short positions of FX swaps described in the MEFP and TMU.
- Monetary Board approved a roadmap for flexible inflation targeting and flexible exchange rate regime (SB, October 2017); cabinet approval of MLA amendments set as new SB by March 2018.
- Program NIR (Program definition) and adjustors:
  - Program NIR at end-2015: US$ 2,893.1 million.
  - Program NIR at end-2016: US$ 2,032.1 million.
  - Program NIR adjustors include foreign program financing, net borrowings from SLDBs and FCBUs, external commercial loans, and proceeds from commercialization of public assets, and amortization of official external debt (see TMU).

### Financial sector stability and supervision
- Financial soundness indicators (selected):
  - Banking system capital adequacy ratio around 15 percent in 2017H1.
  - NPL ratio 2.7 percent and provision coverage ratio 67 percent in 2017Q2.
- Credit growth:
  - Private sector credit growth high at 17.5 percent (y/y) in September; credit growth decelerated to 16.2 percent in October 2017 from 28.5 percent in July 2016 (statement by Executive Director).
  - Staff identify a widening credit gap around 7 percent of GDP.
- Macroprudential and supervisory measures:
  - Consider lower LTV limits on mortgages, higher capital weights on mortgages and construction-related debt, overall debt-to-income limits on consumer loans.
  - Migration to Basel III began in July 2017; all banks met initial requirements.
  - Minimum capital ratios scheduled to rise to international standards by January 2019.
  - Establish a new Resolution and Enforcement Department within CBSL and double minimum equity capital requirement of all licensed banks by end 2020.
  - Upgrade legislation (Banking Act, Finance Business Act, Finance Leasing Act, Microfinance Act).
- AML/CFT: Significant deficiencies remain; Sri Lanka placed under FATF monitoring in October; staff recommends enacting FATF-compliant AML/CFT laws and implementing ICRG action plan items.

### Structural reforms to support growth and consolidation
- Vision 2025 (published September 2017) identifies policies across trade, labor, logistics, social safety nets, and disaster management.
- Priority reforms include:
  - Tax and public finance reforms: IRA legislated in October 2017, effective April 1, 2018; IRA expected to boost revenues by about ½ percent of GDP (annualized) largely through removal of tax exemptions.
  - Tax administration: RAMIS IT system roll-out and VAT compliance strategies; MOF to publish detailed IRA tax manual by January 2018 (SB).
  - Trade and investment: new Trade Policy, review of para-tariffs and non-tariff barriers; GSP plus status with EU resumed mid-2017.
  - Female labor participation: address low female labor participation (36 percent in 2017Q2) via flexible work arrangements, childcare, and legislative reforms.
  - Climate change and disaster resilience: strengthen adaptation, disaster-resilient infrastructure, and fiscal buffers.
- PFM and IT:
  - ITMIS rollout ongoing; expand to 100 spending units in 2018 and fully operational in 2019.
  - MOF to publish quarterly financial bulletins and tax expenditure statement; budgets to adhere to GFSM standards.

### Debt Sustainability and stress tests (Annex I)
- Public debt background:
  - Public debt 85.2 percent of GDP at end-2016: central government debt 80.1 percent; guaranteed debt 4.4 percent; outstanding Fund credit 0.7 percent.
  - Foreign-currency denominated debt accounted for 47 percent of total.
- Gross financing needs:
  - Estimated at 17.6 percent of GDP in 2016: amortization 12.2 percent; overall deficit 5.4 percent.
- Baseline projections:
  - Public debt-to-GDP projected to fall from 85.2 percent in 2016 to 75.1 percent in 2022 under consolidation path.
  - Gross financing needs projected to rise to 20 percent of GDP in 2018 and then decrease to around 13–14 percent of GDP in 2022.
  - Real GDP growth assumptions: recover from 4.4 percent in 2016 to 5 percent by 2022.
  - Primary balance: improves from deficit of 2.2 percent of GDP in 2016 to surplus of 1 percent of GDP in 2018 and 2.5 percent in 2020.
- Stress tests and shock scenarios:
  - Primary balance shock: lower primary surplus by 0.5 percentage points of GDP for 2018–19.
  - Growth shock: GDP growth 2 percentage points lower for 2018–19.
  - Exchange rate shock: 15 percent real depreciation in 2018.
  - Interest rate shock: increase by 300 basis points for new borrowings during 2017–20.
  - Combined shock: debt-to-GDP would reach 94 percent in 2022.
  - Contingent liability shock: central government liable for additional debt of 10 percent of GDP in 2017 would raise debt-to-GDP to 98 percent initially and 89 percent in 2022.
- Risk assessment:
  - Heat map indicates a high risk to debt sustainability.
  - Benchmarks exceeded: Debt burden benchmark 70 percent of GDP; Gross financing need benchmark 15 percent of GDP.

### Program monitoring, conditionality, and TMU highlights
- Review schedule:
  - Semiannual reviews; fourth review on or after April 20, 2018; fifth review on or after November 20, 2018.
- Key quantitative performance criteria and indicative targets (selected exact figures from Table 1):
  - Central government primary balance (floor, Rs Bln): end-Dec. (Prog.) = -8; end-Sep. (IT) Prog. = -23.
  - Program NIR (floor, million US$): end-Dec. (Prog.) = 2,027.
  - Central government tax revenue (floor, Rs Bln): end-Dec. (Prog.) = 803; end-Jun. (Prog., Adj. Prog, Act.) = 1,232 ; 1,232 ; 1,240 ; Met.
  - Reserve money ceiling (billion rupees): end-Dec. (Prog.) = 905; end-Jun. (Prog., Adj. Prog, Act.) = 935 ; 935 ; 909 ; Met.
  - Continuous PC: New external payment arrears by nonfinancial public sector and CBSL (ceiling, US$) = 0 — Met.
- Monetary policy consultation clause:
  - Inflation bands specified (inner and outer) and measurement via CCPI (2013=100); observed values noted in TMU.
  - Consultation triggers if inflation falls outside outer bands for test dates end-December 2017 or end-June 2018, or outside inner bands for specified test dates.
- NCOs monitoring:
  - Indicative target on cost of NCOs for fuel and electricity (net of government transfers) with detailed quarterly measurement rules and lagged aggregation specified in TMU.
- Data reporting requirements and deadlines specified for fiscal, external, monetary, and SOE data (timing ranges: within no more than three to seven weeks, or two months for SOE quarterly data).

### Box: Coping with Natural Disasters (Box 1)
- Severe weather events since late 2016: historical drought and May 2017 monsoon floods/landslides; more than 200 lives lost and more than 9,000 houses damaged.
- Government estimates more than 2 million people affected.
- Economic impacts:
  - Two rice cultivation cycles disrupted; domestic rice production in 2017 estimated to meet only 7 months of national consumption.
  - Agriculture GDP contracted by 3.1 percent in 2017H1.
  - Food inflation: 10.4 percent y/y in September.
  - Food imports increased by US$170 million over January–August 2017 (0.2 percent of annual GDP).
  - Oil imports rose by US$560 million (0.7 percent of GDP) over January–August due to thermal generation shift.
- Distributional impacts:
  - Number of food insecure households rose to 277,000 by August; 30 percent possibly consuming less than daily minimum calorie intake.
- Fiscal costs and relief:
  - Immediate recovery and humanitarian assistance include food voucher Rs 5,000 (US$ 33) to more than 800,000 severely affected households.
  - Government estimates these spending items cost 0.4 percent of GDP in 2017.
  - CEB recorded a financial loss of Rs 34 billion (0.3 percent of GDP) in 2017H1; government transferred Rs 6 billion so far.
- Policy responses and resilience:
  - Disaster insurance scheme for houses; consideration of a natural disaster reserve fund; resettlement and vulnerability assessments; Vision 2025 prioritizes environmental protection and disaster management.

### IMF staff position and recommendations
- Staff supports completion of the third review under the EFF arrangement given progress and commitment to ongoing reforms.
- Fiscal recommendations:
  - Continue revenue-based fiscal consolidation; frontload consolidation to target 1 percent-of-GDP primary surplus in 2018.
  - Effective implementation of the new IRA and tax package to protect social and infrastructure spending.
  - Strengthen disaster provisions in the 2018 budget.
  - Enhance debt and fiscal management frameworks.
- Monetary and external:
  - Maintain a tightening bias until inflation and credit growth stabilize; continue reserves accumulation with greater exchange rate flexibility and consider FX auctions and rules-based FX policies.
- SOE and structural reforms:
  - Proceed without delay on SOE reforms (energy pricing, SriLankan Airlines restructuring); recognize and transfer positive NCOs on-budget; adopt automatic pricing formulas per deadlines.
- Financial sector:
  - Stabilize credit growth using macroprudential measures; strengthen supervision and implement Basel III migration and resolution regimes.
- Program monitoring:
  - Program remains fully financed for the next 12 months with firm assurances from the World Bank, Asian Development Bank, and key bilateral donors; capacity to repay the Fund adequate under baseline but downside risks may require adjustment or additional financing.

*Source: IMF staff report, November 20, 2017.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Program overview and status
- The economic reform program is supported by the extended arrangement under the Extended Fund Facility (EFF) approved in June 2016 for the amount of SDR 1.07078 billion (185 percent of quota and about US$ 1.5 billion) over 36 months.
- Three purchases equivalent to SDR 359.682 million have been made; another purchase equivalent to SDR 177.774 million will become available upon completion of the third review.
- Performance under the program has remained broadly on track since the second review despite weather-related supply shocks.
- All end-June and continuous performance criteria are met.
- Parliamentary submission of the 2018 budget consistent with the program was set as a prior action for the third review and was completed on November 9.
- The 2018 budget targets a primary surplus of 1 percent of GDP and frontloads fiscal consolidation toward the authorities’ objective of reducing the overall fiscal deficit to 3.5 percent of GDP by 2020.
- The authorities announced a new economic plan titled Vision 2025 in September 2017.

### Recent developments (growth, inflation, external)
- Growth and inflation were dominated by weather-related supply shocks in 2017.
  - Real GDP growth pulled down to 3.9 percent (y/y) in 2017H1; services grew modestly and industry expanded strongly (5.8 percent) led by construction, mining and quarry.
  - Headline inflation (y/y) spiked to 7.8 percent in October 2017 due to weather-driven food inflation and the base effect of VAT rate hikes in November 2016; Core inflation declined in October 2017.
- Current account and reserves
  - The current account deficit widened to 3.5 percent of GDP in 2017H1, driven by weather-related imports of food and fuel.
  - Gross international reserves (GIR) increased from US$6 billion at end-2016 to US$7.3 billion at end-September (3.3 months of imports of goods and services).
  - FX purchases by the central bank were about US$1.6 billion over March–October; sovereign bonds of US$1.5 billion were placed in May.
- Capital inflows and markets
  - Portfolio inflows strengthened in 2017Q2; some US$700 million flowed into government securities on a net basis over April–September.
  - Treasury bond yields dropped by 250 basis points during March–September 2017.
  - Sri Lanka’s EMBI spread was 330 bps in 2017Q3 and remained stable.
  - Private sector credit growth remained high at 17.5 percent (y/y) in September; staff analysis suggests the credit gap widened to around 7 percent of GDP.
- Reserve coverage and exchange rate
  - Reserve coverage remains low by most adequacy metrics: 65 percent of the ARA metric and 86 percent of short-term debt at remaining maturity in September 2017.
  - The real effective exchange rate depreciated by 5 percent since end-2016; overvaluation was estimated to exceed 10 percent at end-2016 (CR/17/253).

### Outlook and risks
- Staff baseline projections
  - Real GDP growth is projected to increase from 4.2 percent in 2017 to 4.6 percent in 2018 as agriculture recovers and construction and services remain resilient.
  - Inflation is projected to revert to around 5 percent in end-2017 and throughout 2018.
  - The current account deficit is projected to shrink from 3 percent of GDP in 2017 to 2.5 percent in 2018.
  - Over the medium term, growth is projected to reach about 5 percent (consistent with staff estimate of potential growth).
- Key downside risks
  - High public debt and large financing needs increase vulnerability to shocks.
  - Fiscal risks: ineffective implementation of the IRA, further delays in SOE reforms, and failure to provide for weather calamities.
  - Financial risks: too slow a deceleration in credit growth could heighten financial sector vulnerability; staff identify upside risks to near-term inflation.
  - External risks: possible reversal of sizeable portfolio inflows could raise domestic borrowing costs when large external payments fall due and could erode reserves if used to defend the currency.
- Debt and financing needs
  - Public debt (central government debt, guaranteed debt, and Fund credit outstanding) is expected to rise slightly to 87 percent of GDP in 2017.
  - Gross financing needs (amortization payments plus overall deficit) are projected to reach 20 percent of GDP in 2018.
  - Targeting an overall deficit of 3.5 percent of GDP by 2020 is projected to lower the debt ratio to 81 percent of GDP by 2020 and 75 percent by 2022.
  - SOE liabilities decreased from 13.7 percent of GDP in 2015 to 11.9 percent of GDP in 2016 but remain a major fiscal risk.

### Program performance and structural benchmarks
- Quantitative performance criteria and indicative targets
  - End-June QPC on central government primary balance and net international reserves and ITs for June and September were met.
  - The continuous performance criterion (no new external arrears) has been met.
  - The monetary policy consultation clause has not been triggered as inflation remained within the target band.
- Structural benchmarks (SBs) through November 2017
  - Four out of 5 SBs slated for completion by November 2017 were implemented.
  - On November 9, authorities submitted to Parliament the 2018 budget consistent with program targets and staff recommendations (prior action for the third review).
  - The 2018 budget includes a tax expenditure statement, a plan to rationalize tax expenditures, and the estimated cost of SOEs’ non-commercial obligations (SB, November 2017).
  - A report outlining the cost of non-commercial obligations for fuel and electricity (SB, September 2017) was published in November as an annex to the 2018 budget.
  - A diagnostic review of the VAT system (SB, June 2017) was completed in November.
  - The authorities postponed designing compliance strategies for income taxes (SB, June 2017) until the new IRA is fully operational in 2018.
  - The Monetary Board of the Central Bank of Sri Lanka (CBSL) approved a roadmap for flexible inflation targeting and flexible exchange rate regime (SB, October 2017).

### Policy discussions and recommendations
- Authorities’ pledges and requests
  - The authorities pledged to target a primary surplus of 1 percent of GDP in 2018.
  - The authorities requested a small adjustment of the end-2017 fiscal target due to weather calamities.
  - The authorities pledged to build up net international reserves by about US$700 million in 2018 and undertake energy pricing reforms.
- Fiscal policy
  - Fiscal consolidation should continue to reduce fiscal vulnerabilities.
  - Revenue mobilization: tax revenues increased by 9.3 percent (y/y) in real terms in January–September 2017, driven by a 56.6 percent surge in VAT collections following the November 2016 VAT amendment.
  - Projected 2017 tax to GDP ratio is 12.9 percent (excluding one-off factors), 1 percentage point higher than in 2015.
  - The new Inland Revenue Act (IRA), legislated in October 2017 and to be implemented in April 2018, is expected to boost revenues by about ½ percent of GDP (annualized) largely through removal of tax exemptions.
  - Tax administration reforms (RAMIS IT system roll-out and VAT compliance strategies) support revenue mobilization.
  - Authorities requested lowering the QPC ceiling on primary deficit by Rs 20 billion to Rs 23 billion (0.2 percent of GDP) and the tax revenue IT floor by about 40 billion (0.3 percent of GDP) for end-2017 due to severe weather events.
- Monetary and external policies
  - The central bank should maintain a tightening bias to contain inflation and credit growth pressures, while continuing to accumulate reserves accompanied by greater exchange rate flexibility.
- SOE and structural reforms
  - Reforms of key state enterprises, especially in energy pricing and airline restructuring, should proceed without further delays.
  - Structural reforms are needed to enhance competitiveness and promote inclusive growth.
- Financial sector
  - Financial policies should aim to safeguard stability in light of high credit growth and the widening credit gap.

*Source: IMF staff report, November 20, 2017.*

### 2017. This temporary adjustment is smaller than the Rs 68 billion overperformance in the 2016

### cr1803 - 2017. This temporary adjustment is smaller than the Rs 68 billion overperformance in the 2016

### Fiscal policy and budgetary stance
- Authorities pledged to target a primary surplus of 1 percent of GDP in 2018.
- Overall deficit target of 3.5 percent of GDP by 2020 is consistent with reaching a primary surplus of 2½ percent of GDP by 2020.
- Authorities agreed to frontload fiscal consolidation and target primary surpluses of 1 and 2 percent of GDP in 2018 and 2019, respectively.
- The 2018 budget submitted to Parliament in November was consistent with program targets and met the prior action for the review.
- The revenue package in the budget is estimated to yield 0.8 percent of GDP, coming mostly from:
  - selected removal of VAT exemptions,
  - changes to excise taxes,
  - new levies on telecom usage and cash transactions by financial institutions.
- The budget accommodates appropriations for natural disaster mitigation programs totaling 0.15 percent of GDP.
- Staff supports the request to modify the primary balance QPC and tax revenue IT for end-December to reflect developments since the second review.
- Key fiscal table highlights (selected rows, as provided):
  - Total Revenue and Grants: 1,461 13.3; 1,694 14.3; 1,894 14.5; 1,854 14.2 (Rs Bln % GDP for successive years/projections as shown)
  - Total Expenditure and net lending: 2,229 20.4; 2,334 19.7; 2,581 19.7; 2,597 19.9
  - Overall balance: -768 -7.0; -640 -5.4; -687 -5.2; -742 -5.7
  - Primary balance: -241 -2.2; -29 -0.2; -30.0 -2?; -23 -0.2? (table as provided)
  - Revenue (including measures): 1,461 13.3; 1,694 14.3; 1,894 14.5; 1,854 14.2
  - Tax revenue (including measures): 1,356 12.4; 1,464 12.4; 1,718 13.1; 1,680 12.9
- Staff urged swift implementation of more effective commitment control by the new integrated IT system (ITMIS), delayed to start in 2019.
- Strengthening public debt management:
  - Draft Liability Management Bill to manage debt maturities and earmark proceeds from commercialization of public assets.
  - Cabinet to approve a strategy for managing international sovereign bonds maturing over 2019–22 (new SB by June 2018).
  - Vision 2025 aims to strengthen the Fiscal Management Responsibility Act with binding targets on fiscal deficit and government debt.

### State-owned enterprises (SOEs) and energy sector
- Weak financial performance of major SOEs in 2017 underscores need for timely reforms.
- Three SOEs closely monitored—CEB, CPC, and SriLankan Airlines—recorded a combined loss of Rs 52 billion in 2017H1 (0.4 percent of GDP) versus a combined profit of 0.2 percent of GDP in 2016.
- Rising oil prices and weather shocks increased the cost of non-commercial obligations (NCOs) to supply electricity and fuel below cost-recovery levels.
- Authorities published Statements of Corporate Intent (SCIs) by 5 major SOEs in April 2017 and plan to expand SCIs and develop a KPI-based evaluation framework.
- CEB / CPC / SriLankan Airlines selected figures (as provided):
  - Revenue: 1621.2 ; 2602.0 ; 670.5 (Rupees billions)
  - Expenditure: 1961.5 ; 2632.0 ; 800.6 (Rupees billions)
  - Balance: -34 -0.3 ; -40.0 ; -13 -0.1 (Rupees billions and % of annual GDP)
  - Memorandum item: Outstanding financial obligations, end-2016: 2301.9 ; 3853.3 ; 3172.7 (Rupees billions)
- Energy pricing reform sequence:
  - Report on fuel and electricity NCOs (November 2017).
  - For electricity, establishment of Bulk Supply Transaction Account (March 2018) to enhance transparency.
  - On-budgeting: positive NCOs should be transferred from government to SOEs as above-the-line spending; uncompensated NCOs set as indicative target.
  - Cost-reflective automatic pricing formula:
    - Fuel: cabinet decision by March 2018.
    - Electricity: cabinet decision by Sept 2018.
- The second review set a zero new IT (ceiling) on uncompensated cost of fuel and electricity NCOs for 2018 to encourage recognizing quasi-fiscal subsidies as above-the-line spending.

### Monetary policy and reserves
- Monetary policy should maintain a tightening bias until inflation and credit growth stabilize; macroprudential measures to be used as needed.
- CBSL had kept policy rate unchanged since a 25-bps hike in March 2017.
- Near-term inflation faces upside risks from high credit growth, tight labor market, and depreciating rupee.
- Authorities target to increase net international reserves (program definition) by around US$700 million for 2018.
- End-2018 GIR target: US$8.0 billion, equivalent to 67 percent of the ARA metric and 3.4 months of import.
- CBSL plans to further wind down FX swaps (US$1.85 billion at end-September) to improve reserve composition.
- April 2016 repatriation requirement for export proceeds remains; staff recommends removing this temporary measure as policy adjustments are implemented.
- FX market developments:
  - Since June 2017, CBSL withheld interventions except to accumulate reserves, raising transaction volumes and two-way exchange rate movements.
  - Authorities encouraged to consider FX auctions and rules-based FX policies to further develop FX market and provide transparent reserve accumulation.
- Monetary Board approved a roadmap for flexible inflation targeting and a flexible exchange rate regime (SB). Time-bound reforms include:
  - Revising the Monetary Law Act to establish price stability as the primary objective.
  - Addressing CBSL’s direct fiscal financing.
  - Establishing transparent auction mechanism for reserves accumulation while enhancing FX flexibility gradually.
  - Modifying the existing policy rate structure and strengthening public communication.
  - Cabinet approval of a policy note outlining MLA amendments set as new SB by March 2018.

### Financial sector stability and supervision
- Financial soundness indicators stable but credit growth needs stabilizing to reduce the positive credit gap.
  - Banking system capital adequacy ratio around 15 percent in 2017H1.
  - NPL ratio 2.7 percent and provision coverage ratio 67 percent in 2017Q2.
- Macroprudential measures under consideration include:
  - lower LTV limits on mortgages,
  - higher capital weights on mortgages and construction-related debt,
  - overall debt-to-income limits on consumer loans.
- Supervisory reforms and regulatory actions:
  - Migration to Basel III began in July 2017; all banks met initial requirements.
  - Minimum capital ratios scheduled to rise to international standards by January 2019.
  - Establish a new Resolution and Enforcement Department within CBSL.
  - Double the minimum equity capital requirement of all licensed banks by end 2020.
  - Upgrade legislation (e.g., the Banking Act).
- AML/CFT: Significant deficiencies remain; Sri Lanka was placed under FATF monitoring in October. Staff recommends enacting FATF-compliant AML/CFT laws and implementing ICRG action plan items.

### Structural reforms to support growth and consolidation
- Vision 2025 published September 2017 identifies policies to promote inclusive growth across trade, labor, logistics, social safety nets, and disaster management.
- Priority structural reforms include:
  - Reforms in trade and investment regimes:
    - New IRA strengthens public governance and adopts a simple rules-based framework.
    - Automation of tax and public finance management systems (SBs) to improve transparency and efficiency.
    - New trade policy to facilitate trade and remove barriers to foreign investment; bilateral negotiations ongoing; GSP plus status with EU resumed mid-2017.
    - Review and phased phasing out of para-tariffs and non-tariff barriers aligned with fiscal consolidation.
  - Increasing female labor participation:
    - Low female labor participation (36 percent in 2017Q2) despite high education attainment.
    - Policies considered include flexible work arrangements, more accessible child care, and legislative reforms for female representation quotas.
  - Addressing climate change:
    - Strengthen adaptation and mitigation measures, disaster-resilient infrastructure, and stronger fiscal buffers in future budgets.

### Program monitoring, financing, and risks
- Attached LOI and MEFP describe authorities’ progress and commitments; authorities requested modification of the primary balance QPC and tax revenue IT for end-December.
- Quarterly targets for 2018 proposed, including June QPC on primary balance and NIR, and a new IT on NCOs for fuel and electricity.
- As a prior action for the third review, authorities submitted the 2018 budget to Parliament consistent with the program.
- Program financing and risks:
  - Program remains fully financed for the next 12 months with firm assurances from the World Bank, Asian Development Bank, and key bilateral donors.
  - Capacity to repay the Fund remains adequate under the baseline scenario; downside risks may necessitate further adjustment or additional financing.
  - Key risks: (i) revenue slippage; (ii) weaker than expected net capital inflows and reserves shortfall; (iii) lower than expected growth and/or new pressures on the trade account; and (iv) larger than expected losses at SOEs and slow progress in SOE reforms.

*Source: cr1803 - 2017.*

### 29.      Other issues. The planned revision of the MLA is expected to address the issues identified

### 29. Other issues

### Issues identified in safeguards assessment and MLA revision
- The planned revision of the MLA is expected to address the issues identified by IMF safeguards assessment (August 2016), including:
  - CBSL’s autonomy and governance arrangement concerns, for example:
    - the government’s voting representation in the Monetary Board,
    - absence of recapitalization provisions,
    - inadequate limits on credit to government.
- Following the establishment of a payment platform, external arrears with the Export Development Bank of Iran are being paid based on a schedule shared with the Iranian authorities and will be cleared by February 2018.
- Staff will review the regulations associated with the new FX Act—albeit enacted to further liberalize FX transactions—for their adherence to the Article VIII obligation.

### EFF-supported program status and macroeconomic outlook (Sri Lanka)
- Findings and recent developments:
  - The EFF-supported program remains broadly on track.
  - The authorities continue to make progress with revenue-based fiscal consolidation and reserves accumulation, while amending and legislating the VAT and the new IRA albeit with some delay.
  - The 2018 budget consistent with the program was submitted to parliament.
  - A roadmap for inflation targeting has been approved by the Monetary Board.
  - As the impact of the weather calamities subsides, growth and inflation are projected to normalize in 2018.

### Downside risks and implementation challenges
- Key risks:
  - High public debt and low external buffers continue to expose Sri Lanka to severe downside risks.
  - SOE operating results and debts present further fiscal and debt sustainability risks.
  - Delays with the IRA implementation and SOE reforms could weaken confidence and reverse program progress.
- Policy implication:
  - Stronger and more consistent ownership is needed to accelerate reforms.

### Fiscal policy recommendations
- Revenue-based fiscal consolidation should continue.
- Front-loaded consolidation that targets 1 percent-of-GDP primary surplus in 2018 will help anchor investor confidence.
- Effective implementation of the new IRA and the tax package of the 2018 budget will protect social and infrastructure spending.
- Stronger disaster provisions in the 2018 budget should mitigate weather-related adversities.
- Enhancing debt and fiscal management frameworks will support durable fiscal consolidation.

### SOE reforms
- SOE reforms should progress without further delay.
- Following steps to raise the transparency of NCOs for fuel and electricity, the authorities should make timely progress in adopting the automatic pricing formula.
- The authorities should resolve the impasse in restructuring Sri Lankan Airlines and move forward.

### External sector and exchange rate policy
- Reserves accumulation should continue with greater exchange rate flexibility.
- Greater reserve coverage and exchange rate flexibility will help contain external vulnerability and provide buffer against market volatility.
- The authorities should build on the growing depth of FX market by adopting FX auctions to enhance market development and transparency.

### Monetary policy and financial sector oversight
- The central bank should focus on stabilizing inflation and manage financial sector risks.
- Monetary policy should maintain a tightening bias, supplemented by macroprudential measures as needed, until clearer signs emerge that inflation and credit growth have stabilized.
- Financial sector supervision should be strengthened to safeguard stability and protect against rapid credit growth.

### IMF staff position
- Staff supports the completion of the third review under the EFF arrangement, in light of the progress so far and the authorities’ commitment to ongoing reforms.
- Staff also supports the authorities’ request for modification of program conditionality as described in paragraph 27.

*Source: cr1803 - 29.      Other issues. The planned revision of the MLA is expected to address the issues identified — https://www.imf.org/-/media/files/publications/cr/2018/cr1803.pdf*

### Box 1. Sri Lanka: Coping with Natural Disasters

### Box 1. Sri Lanka: Coping with Natural Disasters

### Severe weather events and scope
- Nationwide shortage of rainfall since late 2016 led to a historical drought across the country.
- The monsoon in May 2017 triggered devastating floods and landslides in southwest regions, claiming more than 200 lives and damaging more than 9,000 houses.
- The government estimates that more than 2 million people have been affected by these two severe weather events.
- Climate change is identified as a possible culprit for the erratic weather pattern; global warming is projected to make monsoon rainfall more variable in South Asia, with greater frequency of devastating floods and droughts (World Bank, 2013, “Turn Down the Heat: Climate Extremes, Regional Impacts, and the Case for Resilience”).

### Economic impacts
- Two rice cultivation cycles disrupted since fall 2016; government estimates domestic rice production in 2017 to be the lowest in the last 10 years and meet only 7 months of national consumption.
- Agriculture GDP contracted by 3.1 percent in 2017H1, with adverse consequences on overall growth and tax revenues.
- Food shortage contributed to food inflation accelerating to 10.4 percent y/y in September.
- Food imports increased by US$170 million over January–August 2017 (0.2 percent of annual GDP) compared with the same period last year.
- Drought caused a shift in power generation from hydro to thermal sources, raising oil imports by US$560 million (0.7 percent of GDP) over January–August and increasing the cost of power generation.

### Distributional impacts (vulnerability of households)
- The impact has been felt disproportionately by the poor; drought deprived livelihoods from families engaged in agricultural labor and subsistence.
- According to the UN World Food Program, the number of food insecure households rose to 277,000 by August, with 30 percent of them possibly consuming less than the daily minimum calorie intake.
- Property damage from the floods is noted to be more difficult for poor households to overcome.

### Fiscal and financial costs of relief and recovery
- Immediate recovery and humanitarian assistance include:
  - Targeted income support that provides more than 800,000 severely affected households with a food voucher of Rs 5,000 (US$ 33).
  - Rehabilitation for damaged property, e.g., construction of new houses for landslide victims.
  - Rehabilitation of road and irrigation systems.
- The government estimates the cost of these spending items to be 0.4 percent of GDP in 2017.
- The cost for higher thermal power generation caused CEB to record a financial loss of Rs 34 billion (0.3 percent of GDP) in 2017H1, for which the government transferred Rs 6 billion so far.
- Post-disaster fiscal costs include both immediate spending and indirect effects on growth, inflation, and trade balance.

### Policy responses and resilience measures
- Authorities pledged to prioritize environmental protection and disaster management (Vision 2025).
- Government measures and intentions:
  - Established a disaster insurance scheme for houses against natural disasters.
  - Intends to establish a natural disaster reserve fund to finance post-disaster reconstruction.
  - Considering resettling communities in landslide prone areas.
  - Undertaking vulnerability and risk assessment.

*Source: Box 1 text from the IMF staff report.*

### Annex I. Debt Sustainability Analysis

### Annex I. Debt Sustainability Analysis

### A. Background and Key Assumptions

- Public debt reached 85.2 percent of GDP at end-2016.
  - Composition in this DSA: central government debt 80.1 percent of GDP, outstanding loans guaranteed by the central government 4.4 percent of GDP, outstanding Fund credit 0.7 percent of GDP.
  - Foreign-currency denominated debt accounted for 47 percent of total.
  - Debt owed to official and multilateral creditors accounted for about a quarter of the total.
- Gross financing needs were estimated at 17.6 percent of GDP in 2016, comprising:
  - Amortization payments (including short-term debt repayment) of 12.2 percent of GDP.
  - Overall deficit of 5.4 percent of GDP.
- Comparatives:
  - Sri Lanka’s debt to GDP ratio vs. emerging economies median: 85.2 percent vs. 57 percent (excluding major oil exporters).
  - Gross funding needs rank: third largest among emerging economies.
- Nonfinancial SOEs:
  - Financial obligations of nonfinancial SOEs estimated at 11.9 percent of GDP at end-2016.
  - Ministry of Finance publishes financial performance of 41 nonfinancial SOEs; these 41 recorded a profit of 0.3 percent of GDP in 2016.
  - SOE profit detail: Ceylon Petroleum Corporation profit 0.6 percent of GDP; Ceylon Electricity Board loss 0.1 percent of GDP; SriLankan Airlines loss 0.3 percent of GDP.
  - Nonfinancial SOEs’ financial obligations fell by 1.8 percentage points of GDP in 2016 due to CPC debt repayment and SriLankan Airlines lease cancellations.
  - Financial obligations of SOEs are not included in public debt outstanding under this DSA; contingent liabilities from SOEs are assessed under shock scenarios.
- External debt and rollover:
  - External debt estimated at 57 percent of GDP at end-2016.
  - Predominantly public: 34 percent of GDP held by general government, 2 percent by the central bank.
  - Private external debt around 22 percent of GDP since 2014.
  - Debt to exports ratio: 264 percent in 2016.
  - Maturity profile: 85 percent of total debt (public and private) is medium or long term.
  - Next sovereign bond repayment: US$1.5 billion falls due in 2019.
  - About half of the central government’s external debt stock is denominated in dollars.
- Baseline macro and fiscal assumptions under the EFF-supported program:
  - Real GDP growth: recover from 4.4 percent in 2016 to 5 percent by 2022.
  - Inflation: around 5 percent over the medium term.
  - Fiscal deficit: programmed to decrease from 5.4 percent of GDP in 2016 to authorities’ target of 3.5 percent of GDP in 2020.
  - Primary balance: improves from deficit of 2.2 percent of GDP in 2015 to surplus of 1 percent of GDP in 2018, then surplus of 2.5 percent of GDP in 2020.
  - Interest payments: projected based on existing debt and interest rates prevailing thus far in 2017 for newly issued debt in 2017; interest rates for newly issued debt assumed to decrease gradually over the medium term.
  - Publicly guaranteed debt: projected to remain constant as a percent of GDP at the 2016 level.
  - External debt projections: based on current account deficit path from 3 percent of GDP in 2017 to around 2 percent of GDP over the medium term; incorporate planned Fund purchases and disbursements by multilateral and bilateral creditors.

### B. Public Debt Sustainability

- Program scenario outcomes:
  - Public debt to GDP projected to fall from 85.2 percent in 2016 to 75.1 percent in 2022 under the consolidation path.
  - Debt-to-GDP ratio reduction: about 2–3 percent annually from 2018 onwards.
  - Gross financing needs projected to rise to 20 percent of GDP in 2018 and then decrease to around 13–14 percent of GDP in 2022.
  - Dynamics supported by negative interest-rate-and-growth differential and primary surpluses.
- Downside risks and shock scenarios:
  - If fiscal consolidation stalls and primary balance remains at historical level (-1.5 percent of GDP), debt-to-GDP would remain about the same as in 2016.
  - Individual shock effects:
    - Primary balance shock: lower primary surplus by 0.5 percentage points of GDP for 2018–19.
    - Growth shock: GDP growth 2 percentage points lower than in the program scenario for 2018–19.
    - Exchange rate shock: 15 percent real depreciation in 2018 vis-à-vis the program scenario.
    - Interest rate shock: increase by 300 basis points for new borrowings during 2017–20 vis-à-vis the program scenario.
  - Combined shock: debt-to-GDP would reach 94 percent in 2022.
  - Contingent liability shock: central government liable for additional debt of 10 percent of GDP in 2017 would cause debt-to-GDP to jump to 98 percent initially and gradually decline to 89 percent of GDP in 2022.
  - In combined shock and contingent liability shock scenarios, gross funding needs would remain elevated at 16−19 percent of GDP in 2022.
  - Constraints: high debt level relative to revenues, constraining repayment capacity.
  - Fiscal consolidation challenge: envisaged improvement in cyclically adjusted primary balance by 3.3 percentage points of GDP over 2016−18 is higher than in 80 percent of international experiences.
- Risk assessment:
  - Heat map analysis indicates a high risk to debt sustainability.
  - Benchmarks exceeded during projection period:
    - Debt burden benchmark: 70 percent of GDP.
    - Gross financing need benchmark: 15 percent of GDP.
  - Debt profile analysis indicates moderate vulnerabilities related to market perception, external financing requirement, debt held by non-residents, and debt denominated in foreign currency.

### C. External Debt Sustainability

- Projections under the program scenario:
  - External debt projected to decrease from 57 percent of GDP in 2016 to around 52 percent in 2022.
  - Drivers of the decline: robust GDP growth, steady fiscal consolidation, and gradual current account adjustments.
- Currency and maturity risks:
  - External debt remains sustainable but with high currency risks.
  - Risks are mitigated by long maturities and Sri Lanka’s access to international financial markets.

*Source: Annex I. Debt Sustainability Analysis, cr1803*

### 9.      Nevertheless, vulnerabilities linked to inadequate reserve coverage, exchange rate

### 9. Nevertheless, vulnerabilities linked to inadequate reserve coverage, exchange rate depreciation, and deleveraging could pose a risk for debt servicing

### Key risks to debt servicing
- Currency risk, notably related to the dollar, is high.
- A 30 percent real depreciation could raise the external debt to GDP ratio to about 75 percent by 2022.
- Large rupee depreciation could pose a significant risk, if sustained.
- In the short run, tighter global liquidity and shifts in investor confidence could raise rollover vulnerabilities and costs.
- Although rollover risks are currently low due to the high share of medium- to long-term debt, there are lumpy repayments starting in 2019.
- External financing at non-concessional terms is gradually substituting concessional financing, pointing to a need to speedily build up buffers.
- Lower than expected GDP or export growth would deteriorate debt dynamics.

### Debt profile and baseline projections (selected figures)
- Nominal gross public debt projections (in percent of GDP): 76.0 (2015), 83.2 (2016), 85.2 (2017), 87.0 (2018), 86.2 (2019), 83.7 (2020), 80.7 (2021), 77.9 (2022), 75.1 (2022 cumulative shown in table).
- Public gross financing needs (in percent of GDP): 22.6 (2015), 21.1 (2016), 17.6 (2017), 19.1 (2018), 19.9 (2019), 17.6 (2020), 14.3 (2021), 13.4 (2022), 13.5 (2022 cumulative).
- Real GDP growth (in percent): 6.2 (2015), 4.8 (2016), 4.4 (2017), 4.2 (2018), 4.6 (2019), 4.7 (2020), 4.8 (2021), 4.9 (2022), 5.0 (2022 final).
- Inflation (GDP deflator, in percent): 8.9 (2015), 0.8 (2016), 3.6 (2017), 5.6 (2018), 4.8 (2019), 5.0 (2020), 5.0 (2021), 5.0 (2022).
- Effective interest rate (in percent): 7.5 (2015), 7.0 (2016), 7.1 (2017), 7.6 (2018), 8.0 (2019), 8.2 (2020), 8.5 (2021), 8.7 (2022), 8.8 (2022 final).
- Change in gross public sector debt (cumulative projection): -0.1 (2015), 4.9 (2016), 2.0 (2017), 1.8 (2018), -0.8 (2019), -2.5 (2020), -3.0 (2021), -2.8 (2022), -2.8 (2022 cumulative), -10.1 (cumulative over projection).
- Primary deficit (in percent of GDP): 1.6 (2015), 2.2 (2016), 0.2 (2017), 0.2 (2018), -1.0 (2019), -2.0 (2020), -2.5 (2021), -2.4 (2022), -2.3 (2022 final), cumulative -10.0.

### Stress tests and scenario outcomes
- Real depreciation shock: One-time real depreciation of 30 percent occurs in 2017. Result: external debt to GDP could rise to about 75 percent by 2022 under this shock.
- Combined shock, contingent liability, and other stress tests were run; baseline external debt projection: 52 percent of GDP in the baseline (2017 onward), historical and scenario boxes show averages (e.g., historical 53, baseline 52 in some charts).
- External debt baseline: 54.2 (2012), 53.6 (2013), 54.2 (2014), 56.4 (2015), 57.1 (2016), 58.2 (2017), 57.9 (2018), 57.0 (2019), 55.2 (2020), 53.5 (2021), 52.3 (2022).
- Change in external debt (in percent of GDP): 4.0 (2012), -0.6 (2013), 0.7 (2014), 2.1 (2015), 0.8 (2016), 1.0 (2017), -0.3 (2018), -0.9 (2019), -1.8 (2020), -1.7 (2021), -1.2 (2022).
- Identified external debt-creating flows (4+8+9) across projections sum to mostly negative contributions in later years (e.g., -1.3 in 2018, -1.4 in 2019, -1.7 in 2020, -1.5 in 2021, -1.7 in 2022).
- Gross external financing need (in billions of US dollars): 13.0 (2012), 11.9 (2013), 11.1 (2014), 12.2 (2015), 12.8 (2016), 11.0 (2017), 10.6 (2018), 12.7 (2019), 12.6 (2020), 12.8 (2021), 13.4 (2022).
- Gross external financing need (in percent of GDP): 19.0 (2012), 16.0 (2013), 14.0 (2014), 15.3 (2015), 15.8 (2016), 10-Year and other series shown in table.

### External debt dynamics and automatic debt dynamics components
- Automatic debt dynamics contributions (cumulative and annual): interest rate/growth differential and components shown in projections; examples: automatic debt dynamics entries include -4.3 (2015), 4.2 (2016), 0.7 (2017), -1.9 (2018), -1.2 (2019), -1.4 (2020), -1.2 (2021), -1.1 (2022), cumulative -7.8.
- Of which: real interest rate contributions: -1.2 (2015), 4.6 (2016), 2.6 (2017), 1.3 (2018), 2.4 (2019), 2.3 (2020), 2.5 (2021), 2.5 (2022), cumulative 13.5.
- Of which: real GDP growth contributions: -4.1 (2015), -3.6 (2016), -3.4 (2017), -3.2 (2018), -3.6 (2019), -3.7 (2020), -3.7 (2021), -3.6 (2022), cumulative -21.3.
- Exchange rate depreciation contribution examples: 1.0 (2015), 3.2 (2016), 1.5 (2017) (further years shown as dots in table).

### Composition of public debt and alternative scenarios (selected assumptions)
- Baseline Real GDP growth: 4.2 (2017), 4.6 (2018), 4.7 (2019), 4.8 (2020), 4.9 (2021), 5.0 (2022).
- Baseline Primary Balance (in percent of GDP): -0.2 (2017), 1.0 (2018), 2.0 (2019), 2.5 (2020), 2.4 (2021), 2.3 (2022).
- Historical Scenario Real GDP growth: 4.2 (2017), 5.9 (2018), 5.9 (2019), 5.9 (2020), 5.9 (2021), 5.9 (2022).
- Constant Primary Balance Scenario Primary Balance: -0.2 for all projection years (2017–2022).
- Public gross financing needs and debt by maturity and currency are tracked in projections (charts show shares by medium and long-term vs short-term; local currency vs foreign currency).

### Fiscal structural reforms — progress and future actions
- Tax policy
  - Progress: Amendments to VAT in 2016 increased the VAT rate from 11 to 15 percent, removed exemptions on telecoms and health care (excluding diagnostic tests, dialysis and services provided by the Outpatient Department), and lowered the VAT threshold for wholesale and retail sectors. A new Inland Revenue Act (IRA) was drafted and submitted to Parliament in July 2017, and legislated in October 2017.
  - Future actions: With legislation of the new IRA complete, focus now turns to its implementation. Efforts will continue to identify further tax policy options, including base-broadening through the removal of VAT exemptions and the streamlining of other indirect taxes.
- Tax administration
  - Progress: A VAT compliance strategy with a time-bound plan to implement risk-based audits and KPIs has been implemented for large businesses on a pilot basis. RAMIS IT system rolled out in December 2016. The Implementation Steering Committee for the new IRA has drafted a detailed implementation plan.
  - Future actions: Implementation plan to be rolled over the next year, including publication of tax manuals (January 2018 structural benchmark), updating regulations, training tax administrators, taxpayer education, and modifications to the existing IT system. VAT compliance strategies will be implemented for all large taxpayers and extended to medium- and small-taxpayers.
- Public financial management (PFM)
  - Progress: The Ministry of Finance modified its existing IT system and can now track spending commitments for each line ministry monthly and has begun reporting fiscal performance to parliament quarterly. ITMIS rollout to Ministries of Health and Finance is ongoing but operated in parallel to existing system with commitment ceilings modified manually.
  - Future actions: ITMIS will be expanded to 100 spending units in 2018 and is expected to become fully operational in 2019. Starting in 2018, quarterly commitment ceilings will be established for line ministries through modification of the existing IT system (CIGAS) (January 2018 structural benchmark); administered manually initially. This requires training accounting officers in line departments and upgrading IT systems.
- SOE reform
  - Progress: Statements of Corporate Intent (SCIs) for five SOEs (electricity, petroleum, airport and aviation, water, and ports authority) were signed and published in April 2017. Restructuring of SriLankan Airlines is ongoing with a resolution strategy approved by cabinet; route and fleet optimization undertaken. Securing a strategic partner and resolving capital injection and debt consolidation has been significantly delayed.
  - Future actions: Authorities are developing a framework for evaluating the five SOEs against key performance indicators and plan to expand SCIs to other SOEs. Authorities aim to put SriLankan Airlines on a commercial footing and resolve fiscal contributions to the airline’s liabilities; a government task force overseen by the Prime Minister’s office will map out the reform timeline.
- Fuel and electricity pricing
  - Progress: Authorities have capacity to design and implement automatic fuel and electricity prices, but political sensitivity has hampered progress. A report on the cost of non-commercial obligations (NCOs) for fuel and electricity was completed and published as an annex to the 2018 budget.
  - Future actions: A Bulk Supply Transactions Account will be established by March 2018 (structural benchmark) to refine NCO estimates for electricity. Authorities will recognize the quasi-fiscal cost of fuel and electricity NCOs as central government expenditure by explicitly accounting for them in the EFF program targets. Starting in 2018, an indicative target is set on the cost of NCOs for fuel and electricity (net of government transfers). Cabinet approval of the automatic pricing mechanism will be obtained for fuel by March 2018 and for electricity by September 2018 (structural benchmarks).

*Source: IMF staff, Sri Lanka: Public DSA Risk Assessment and related annexes (as provided in the source content).*

### Annex II. State of Fiscal Structural Reforms (concluded)

### Annex II. State of Fiscal Structural Reforms (concluded)

### Compensating Fuel and Electricity NCOs
- Fuel prices and electricity tariffs are publicly administered and predominantly fixed since 2015, resulting in non-commercial obligations (NCOs) when CEB and CPC supply below cost-recovery prices.
- NCOs are economically equivalent to quasi-fiscal energy subsidies and, in principle, should be compensated by on-budget government transfers to CEB and CPC; historically, losses were financed by bank loans or equity injections instead.
- Automatic pricing mechanisms for fuel and electricity—envisaged by March and September 2018, respectively—would effectively eliminate the NCOs.
- In the absence of automatic pricing, explicitly recording NCO costs as on-budget spending is recommended to enhance transparency and inform public debate on price adjustments.
- Under the EFF-supported program, an indicative target introduces a zero ceiling on the cost of NCOs (net of government transfers).
  - For CPC: cost of NCOs = cost to provide fuel products minus revenue.
  - For CEB: cost of NCOs = decline in the balance of the Bulk Supply Transaction Account, which mirrors the electricity sector’s financial shortfall in a given period.

### Macroeconomic outlook
- Growth was 3.9 percent in 2017 H1 and is projected to be below 4.5 percent for the entire year, with agriculture dampened by drought and floods while manufacturing, construction, and services marginally offset the weakness.
- Credit growth is expected to continue a downward trend as a lagged response to monetary tightening in 2016 and 2017.
- Current account deficit is expected to widen due to higher imports of food and fuel stemming from weather-related disruptions.
- Headline inflation is expected to stabilize to mid-single digit and stay within the inner band for the remainder of the year.
- Growth is expected to rebound in 2018 as agriculture production normalizes and infrastructure projects progress.

### Program performance (third review)
- End-June quantitative targets were met for the primary balance and tax revenues.
- Net international reserves (NIR) target was met by a margin of $174 million.
- Reserve money target was below the IT target by about Rs 15 billion.
- Inflation remained within the inner consultation band despite supply disruptions.
- Progress on structural measures includes legislating the Inland Revenue Act (IRA); some structural benchmarks experienced delays and corrective actions will be taken to meet future SBs in a timely manner.

### Fiscal policy — Fiscal stance and targets
- Central priority: durable reduction of the fiscal deficit and public debt through domestic revenue mobilization.
- Overall fiscal deficit fell to 5.4 percent of GDP in 2016 from 7 percent in 2015.
- Government aims to bring overall central government deficit down to at least 3.5 percent of GDP by 2020.
- Debt targets: central government debt about 75 percent of GDP in 2020 and 70 percent of GDP by 2022.
- Program targets:
  - Small primary deficit in 2017.
  - Primary surplus of 1 percent of GDP in 2018.
  - Primary surplus of 2 percent of GDP in 2019.
  - Annual increase in the tax-to-GDP ratio by about 1 percentage point of GDP for 2017−19.
- Commitment to revise the Fiscal Management (Responsibility) Act to include binding targets for the government deficit and level of overall public debt to ensure consolidation beyond 2019.
- Proposal to introduce a debt management strategy for managing international sovereign bonds maturing over 2019-22 by June 2018 (new structural benchmark).

### Fiscal policy — 2017 performance risks and 2018 budget
- For 2017:
  - Tax revenue to GDP projected to increase by ½ percentage point to about 13 percent in 2017, but fall short of the program’s indicative target by 0.3 percentage point.
  - Weather-related spending needs expected to reach about Rs 50 billion (0.4 percent of GDP), including in-kind assistance to 840,000 needy families and reconstruction.
  - Drought-driven surge in thermal generation caused quasi-fiscal losses of Rs 48 billion (0.3 percent of GDP) in 2017H1 for Ceylon Electricity Board (CEB); government transferred Rs 6 billion to CEB.
  - As a result, the central government is expected to record a small primary deficit; authorities requested that the end-2017 quantitative performance criterion on primary balance (floor) be revised down from Rs -3 billion (0 percent of GDP) to Rs -23 billion (0.2 percent of GDP).
- 2018 budget:
  - Targets a primary surplus of about Rs 140 billion (1 percent of GDP).
  - To be achieved by increasing the revenue-to-GDP ratio by about 1 percentage point, anchored by a revenue package yielding Rs 110 billion (0.8 percent of GDP).
  - Revenue package components: VAT base-broadening, excise tax reforms for vehicle and beverage, new levies on telecom and cash transactions by financial institutions, and rate revision of fees and charges.
  - Appropriations for mitigation programs (river bank protection, crop insurance, urban flood mitigation, resettlement) amount to Rs 21 billion (0.15 percent of GDP) within the total budget envelope.
  - Commitment: preserve expenditure space for productive human and physical capital; publish tax expenditure statement and plan to rationalize tax expenditures; estimate fiscal cost of NCOs for SOEs and report cost of fuel and electricity NCOs (structural benchmarks).
  - Diagnostic review of the VAT system (structural benchmark completed in November) identified VAT measures included in the 2018 budget.

### Revenue mobilization
- Steps taken:
  - Cabinet suspended the Board of Investment Act in May 2016, concentrating tax incentive powers in the Ministry of Finance.
  - VAT amendment in November 2016 raised the VAT rate from 11 percent to 15 percent and broadened the base by eliminating exemptions for telecommunication and private healthcare (excluding specified services); VAT continues to apply to wholesale and retail trade.
  - Diagnostic review of VAT concluded VAT expenditure is 1.3 percent of GDP; VAT base to be further broadened in 2018 through rationalization of exemptions.
- Inland Revenue Act (IRA) enacted, with features including:
  - Removal of tax exemptions to broaden the tax base.
  - Modernized principle-based drafting style to streamline structure and simplify language.
  - Introduction of a capital gains tax on immovable property, increased taxes on dividends and interest incomes, and specified fees.
  - A transparent set of investment-based tax incentives.
  - Strengthened administrative powers for the Inland Revenue Department (IRD) to improve compliance.
- IRA implementation timeline and preparatory measures:
  - Effective date set to April 1, 2018.
  - Regulations: drafts of revised regulations expected to be completed soon and published in draft form by January 2018.
  - Staff training: MOF and IRD staff trained in fall 2017, with head office and regional IRD staff training planned for February 2018.
  - Communication: a detailed IRA tax manual to be published by January 2018 (new structural benchmark) and a media campaign and taxpayer awareness programs to follow.
  - IT systems: RAMIS upgrade plan to be finalized by end-2017 and approved by the Steering Committee.
  - Business processes: modifications for new taxes and withholding tax changes to be approved by the Steering Committee by December 2017.
- Tax administration improvements:
  - RAMIS IT system rollout and adoption of a VAT compliance strategy with risk-based audits, initially for large businesses then extended to SMEs.
  - Organizational reforms at IRD: restructuring along functional lines, creating a design and monitoring unit, strengthening the Large Taxpayer Unit, introducing mandatory e-filing, and enhancing taxpayer identification number usage.
  - Customs IT (ASYCUDA) improved with automated case selection for risk-based cargo audit.

### Public financial management (PFM)
- IT and commitment control:
  - MOF modified existing PFM IT system (CIGAS) to track spending commitments in real time for a subset of line ministries, aiding cash management and spending reallocation.
  - Quarterly commitment ceilings capability has not yet been fully implemented due to delays in rolling out ITMIS; interim plan to further modify CIGAS to impose quarterly commitment ceilings for individual spending units from the beginning of 2018 (structural benchmark).
- ITMIS rollout and functionality:
  - Phase I (budget planning module) used by Ministry of Finance and Ministry of Health in December 2016.
  - Trial use by National Budget Department to prepare Budget Book in 2016; all ministries and departments used ITMIS in October/November 2017 to send 2018 budget estimates.
  - Planned pilots for revenue management, purchasing management, treasury management, expenditure management and general ledger with Ministry of Finance and Ministry of Higher Education and Highways; plan to expand ITMIS functionalities to 100 additional spending units in 2018.
  - Full ITMIS operationalization currently expected only in 2019.
- Transparency and reporting:
  - MOF will publish quarterly financial bulletins summarizing government fiscal operations.
  - Annual budgets will explicitly cost out tax expenditures and adhere to Government Finance Statistics Manual (GFSM) standards.
  - Budgets will include an analysis of fiscal risks, including those related to SOEs and public-private partnerships (PPPs).

*Source: cr1803 - Annex II. State of Fiscal Structural Reforms (concluded)*

### 14.      The financial condition of some of our state enterprises and ultimate responsibility

### 14.      The financial condition of some of our state enterprises and ultimate responsibility for their existing obligations

### Financial condition of SOEs — findings and near-term strategy
- Sri Lanka currently has about 200 public enterprises representing a substantial share of the nation’s economic activity.
- With IMF technical assistance, outstanding financial obligations of SOEs were identified totaling Rs 1.4 trillion in end-2016, including Rs 1.2 trillion for CPC, CEB, SriLankan Airlines, and the Sri Lanka Ports Authority.
- Collectively these SOEs represent a risk to public finances (either directly or through the state banks which fund the largest SOEs).
- Near-term strategy elements:
  - Statements of Corporate Intent (SCIs) were signed and published in April 2017 for the five largest SOEs (CPC, CEB, National Water Supply and Drainage Board, Airport and Aviation Services Limited, and Sri Lanka Ports Authority).
    - SCIs encompass the SOE’s mission, high level objectives, and multiyear corporate plan; capital expenditure and financing plans; and explicit financial and non-financial key performance indicators (KPIs).
    - Engagement with these SOEs will be based on the SCIs, with periodical monitoring of financial performance and compliance with the KPIs.
    - SCIs include description and cost of non-commercial obligations (NCOs) such as utility subsidies to strengthen transparency and fiscal accountability.
    - Plans to strengthen the legal framework for governance and oversight of SOEs, including coherent financial regulations for SOEs on governance, accountability, and funds management.
  - SriLankan Airlines resolution strategy:
    - A resolution strategy originally approved by Cabinet in 2015 has been implemented; the airline undertook route and fleet optimization, reducing operational losses.
    - Next steps—securing a strategic partner and resolving capital injection and debt consolidation to remove the company from government accounts—have been significantly delayed.
    - The airline still operates with losses and is subject to a lease contract of 4 large airplanes which can further worsen profitability.
    - A government task force, overseen by the Prime Minister’s office, has been set up to map out the reform timeline; if necessary, key milestones will be set as a structural benchmark for future program reviews.
    - The company’s financial performance will be reported on a quarterly basis (see the Technical Memorandum of Understanding).
  - Automatic pricing mechanisms and NCO accounting for fuel and electricity:
    - The original structural benchmark to establish automatic fuel and electricity pricing mechanisms by end-2016 has not been met.
    - A delayed report outlining the cost of NCOs for fuel and electricity was completed in November 2017 (structural benchmark), supported by IMF TA.
    - To correctly estimate electricity NCOs, the CEB and the Public Utilities Commission will establish a Bulk Supply Transactions Account and start using it to settle transactions as specified in the November 2015 tariff methodology by March 2018 (structural benchmark).
    - Starting in 2018, an indicative target will be set on the cost of NCOs for fuel and electricity (net of government transfers) and recognized as central government expenditure in the EFF program targets (see the Technical Memorandum of Understanding).
    - Cabinet approval of the automatic pricing mechanism for fuel by March 2018 and for electricity by September 2018 is intended (structural benchmarks).
    - Financial performance of CPC and CEB will continue to be reported quarterly (see the Technical Memorandum of Understanding).
    - Intention to introduce cost-reflective water tariff settings when the PUC starts regulating the water sector.

### Monetary and exchange rate policy — objectives and measures
- Policy focus:
  - Keep inflation in the mid-single digits.
  - Reined inflationary pressures and curtail credit growth by raising policy rates by 25 bps in March 2017.
  - Maintain a tightening bias until clear signs emerge that inflation and credit stabilize; monitor through a monetary policy consultation clause and reserve money developments (see the Technical Memorandum of Understanding).
- Flexible inflation targeting roadmap:
  - A roadmap for flexible inflation targeting and flexible exchange rate regime was completed in October 2017 (a structural benchmark) and approved by the Monetary Board.
  - Cabinet consent for amendments to the Monetary Law Act (MLA), including those to strengthen the envisaged flexible inflation targeting framework, will be obtained by March 2018 (a new structural benchmark).
  - Roadmap aims and associated actions:
    - Establish inflation as the nominal anchor allowing greater exchange rate flexibility.
    - Ensure separation between fiscal and monetary policies.
    - Retain a role for the CBSL in smoothing excessive exchange rate volatility and adopt FX intervention policies consistent with a flexible exchange rate regime.
    - Improve foreign exchange market functionality, including further liberalizing financial account transactions, deepening the FX market, and introducing FX auction.
    - Ensure financial sector stability while assessing risks associated with greater FX flexibility.
    - Develop technical infrastructure, including improved forecasting and modeling capabilities with continued IMF TA.
    - Establish policy decision making guidelines on choice of targets and handling unanticipated shocks.
    - Strengthen public-awareness outreach as cornerstone of CBSL’s communication during the IT transition.
- CBSL autonomy and governance:
  - IMF safeguards assessment (completed in August 2016) identified issues in CBSL autonomy and governance (government voting representation in the Monetary Board, absence of recapitalization provisions, inadequate limits on credit to government).
  - These issues will be addressed through MLA amendments in consultation with the IMF.
- Exchange rate strategy and reserve buildup:
  - CBSL intends to durably transition to a more flexible exchange rate regime, aiming to develop a deeper FX market, review and manage exchange rate risks, and adopt an intervention strategy to build external reserves while maintaining exchange rate flexibility.
  - Since late May, CBSL intervened in FX market only to build reserves or stem excessive movements; will continue to do so and consider FX auctions to accumulate reserves transparently.
  - Strengthening of reserve coverage (guided by IMF’s ARA reserve metric) has been programmed, supported by regular FX purchases.
    - Program NIR (per TMU definition) recovered from a low level below the program target at end-2016 to $2.3 billion by end-April, and to $4.2 billion at end-June with the $1.5 billion Eurobond issuance in May and continuing FX purchase.
    - Between January and May 2017, the exchange rate depreciated by around 1.8 percent against the US$.
    - Plan to fully offset the end-2016 NIR shortfall within 2017 through FX purchases while allowing greater exchange rate flexibility.
    - Monthly consultation with the IMF on corrective actions in foreign exchange intervention if significant deviations occur; consult Fund staff if a highly disruptive exchange rate movement arises.
    - Gradual winding down of FX swaps with domestic commercial banks from $2.5 billion at end-2016 to $1.9 billion at end-August 2017; plan to further reduce swap liabilities gradually during 2018.
- External transactions and liberalization commitments:
  - During the program, Sri Lanka will not impose or intensify restrictions on payments and transfers for current international transactions; will not introduce or modify multiple currency practices; will not conclude bilateral payments agreements inconsistent with Article VIII; will not impose or intensify import restrictions for BOP reasons.
  - The Government enacted the Foreign Exchange act repealing the previous exchange control law to further liberalize FX transactions; will ensure new regulations are consistent with Article VIII.
  - CBSL and government will abstain from providing subsidized exchange guarantees for foreign currency borrowing.

### Financial sector policies — measures and intentions
- Recent measures implemented:
  - Implemented the first phase of the Basel III capital standards in July and will continue to ensure banks comply with the schedule.
  - Steps taken to establish by January 2018 a new Resolution and Enforcement Department within CBSL to oversee resolution of supervised financial institutions.
- Intended actions to strengthen stability:
  - Start new surveys to analyze emerging issues on credit growth with the intention of implementing macro-prudential tools, as needed.
  - Improve risk management of greater exchange rate flexibility within the financial sector, including through a Financial System Stability Review provided by IMF assistance.
  - Update several laws: Banking Act, Finance Business Act, Finance Leasing Act, and the Microfinance Act to modernize the financial sector.
  - Increase the minimum core capital requirement to strengthen the financial sector.
- Financial soundness indicators:
  - Financial soundness indicators remain adequate for the banking system as a whole, but the capital adequacy ratio (CAR) had been declining until recently as broad-based and still high credit growth increased risk-weighted assets.

### Structural reforms to boost trade, investment, and inclusive growth
- Objectives:
  - Greater integration into regional and global supply chains, higher levels of FDI, and enhanced prospects for private sector investment.
  - Improvements in trade regime and investment climate; start negotiations on several new Free Trade Agreements.
- Recent developments:
  - Lifting of the EU ban on fishery imports and reinstatement of GSP plus trade status with EU in May 2017; positive impact on exports.
  - July 2017: signed a $1.1 billion deal with China for operation and development of the southern deep sea port of Hambantota.
- Policy measures to boost competitiveness:
  - Review trade regime including evaluation of para-tariffs and other nontariff barriers causing high effective protection.
  - Work with the World Bank to strengthen structural competitiveness.
  - Formulated a new Trade Policy and a National Export Strategy to increase trade facilitation efficiency, remove barriers to foreign investment entry and establishment (including access to land), enhance access to finance, and strengthen financial market infrastructure.
  - Create a central portal for information on trade regulations in Sri Lanka.
- 3-year economic delivery program and selected structural reforms:
  - Gender gap and inequality:
    - Facilitate female labor participation by improving access to good quality and affordable child care facilities, facilitating part-time and flexible work arrangements, and improving access to tertiary education and vocational training.
  - Climate change:
    - Established a crop insurance scheme and a disaster insurance scheme under the National Insurance Trust Fund (NITF).
    - Establish a National Disaster Reserve Fund for financing post-disaster reconstruction.
  - Access to finance:
    - Integrate the SME sector into the formal sector through the financial system.
    - Implement policies to increase project-based lending rather than collateral-based lending.

### Risks and contingencies
- Main risks to the program:
  - (i) weaker than projected revenues;
  - (ii) weaker than expected capital inflows, which would widen the projected financing gap given already substantial gross fiscal financing needs of about 19 percent of GDP in 2017;
  - (iii) lower than expected growth or new pressures on the trade or financial account;
  - (iv) weaker than expected performance of state owned enterprises;
  - (v) continued credit growth and higher inflation which could erode external competitiveness.
- Potential consequences:
  - These risks could further challenge public debt and external sustainability.
- Policy stance if risks materialize:
  - The government stands ready to adjust promptly its policies, in close consultation with IMF staff, to ensure achievement of a sustainable external position at the end of the program.

*Source: cr1803 - 14.      The financial condition of some of our state enterprises and ultimate responsibility for their existing obligations*

### 27.      Our program will be subject to semiannual reviews with performance criteria and

### Our program will be subject to semiannual reviews with performance criteria and indicative targets set out in Table 1 attached to this MEFP and Technical Memorandum of Understanding (TMU)

### Review schedule and coverage
- Semiannual reviews with performance criteria and indicative targets set out in Table 1 attached to this MEFP and TMU.
- Completion of the fourth and fifth reviews requires observance of the quantitative performance criteria for end-December 2017 and end-June 2018, respectively, as well as continuous performance criteria, as specified in Table 1.
- Reviews will also assess progress toward observance of the structural benchmarks specified in Table 2 attached to this MEFP.
- Timing:
  - Fourth review on or after April 20, 2018.
  - Fifth review on or after November 20, 2018.

### Quantitative performance criteria and indicative targets (high-level figures from Table 1)
- Central government primary balance (floor, in billion rupees)
  - end-Dec. (Prog.) = -8
  - end-Mar. (IT) (Prog., Adj. Prog, Act.) = -8 ; 16 ; Met
  - end-Jun. (Prog., Adj. Prog, Act.) = -4 ; -4 ; 16 ; Met
  - end-Sep. (IT) Prog. = -23
  - end-Dec. (IT) Prog. series = 15 ; 45 ; 90 ; 141
- Program net official international reserves (Program NIR, floor, in million US$) 1/ 2/
  - end-Dec. (Prog.) = 2,027
  - end-Mar. (IT) (Prog., Adj. Prog, Act.) = 1,874 ; 2,049 ; Met
  - end-Jun. (Prog., Adj. Prog, Act.) = 1,976 ; 2,057 ; 2,568 ; Met
  - end-Sep. (IT) Prog. = 2,236
  - end-Dec. (IT) Prog. series = 1,053 ; 1,133 ; 922 ; 690
- Continuous performance criteria (cumulative from beginning of the program)
  - New external payment arrears by the nonfinancial public sector and the CBSL (ceiling, in million US$) = 0 (Monitored as 0 and Met)
- Monetary policy consultation clause — year-on-year inflation in Colombo Consumers Price Index (in percent) 3/ (bands and observed values)
  - Outer band (upper limit): 7.9 ; 7.9 ; ... ; 8.8 ; 8.8 ; ... ; 8.5 ; 7.7 ; 7.7 ; 7.9 ; 8.0
  - Inner band (upper limit): 6.4 ; 6.4 ; ... ; 7.3 ; 7.3 ; ... ; 7.0 ; 6.2 ; 6.2 ; 6.4 ; 6.5
  - Actual / Center point: 4.9 ; 4.9 ; 6.3 ; inner ; 5.8 ; 5.8 ; 6.0 ; inner ; 5.5 ; 4.7 ; 4.7 ; 4.9 ; 5.0
  - Inner band (lower limit): 3.4 ; 3.4 ; ... ; 4.3 ; 4.3 ; ... ; 4.0 ; 3.2 ; 3.2 ; 3.4 ; 3.5
  - Outer band (lower limit): 1.9 ; 1.9 ; ... ; 2.8 ; 2.8 ; ... ; 2.5 ; 1.7 ; 1.7 ; 1.9 ; 2.0
- Indicative targets
  - Central government tax revenue (floor, in billion rupees)
    - end-Dec. (Prog.) = 803
    - end-Mar. (IT) (Prog., Adj. Prog, Act.) = 803 ; 819 ; Met
    - end-Jun. (Prog., Adj. Prog, Act.) = 1,232 ; 1,232 ; 1,240 ; Met
    - end-Sep. (IT) Prog. = 1,680
    - end-Dec. (IT) Prog. series = 447 ; 924 ; 1,438 ; 1,954
  - Reserve money of the CBSL (ceiling, end of period stock, in billion rupees) 4/
    - end-Dec. (Prog.) = 905
    - end-Mar. (IT) (Prog., Adj. Prog, Act.) = 905 ; 892 ; Met
    - end-Jun. (Prog., Adj. Prog, Act.) = 935 ; 935 ; 909 ; Met
    - end-Sep. (IT) Prog. = 967
    - end-Dec. (IT) Prog. series = 1,020 ; 1,025 ; 1,071 ; 1,095
  - Cost of non-commercial obligations (NCOs) for fuel and electricity (net of government transfers) (ceiling, in billion rupees) 5/ — tracked as an indicative target (see TMU for measurement)

- Memorandum items (selected figures)
  - Net official international reserves (CBSL's conventional definition, end of period stock, in million US$) sample values: 6,168 ; ... ; 6,092 ; 6,023 ; ... ; 6,556 ; 6,541 ; 7,594 ; 7,424 ; 6,781 ; 6,548
  - CBSL's outstanding liabilities in FX swaps with domestic commercial banks (in million US$): reported values include 1,924 ; 1,851
  - Foreign program financing by the central government (in million US$): 125 ; ... ; 0 ; 125 ; ... ; 0 ; 225 ; 0 ; 0 ; 100 ; 200
  - Net borrowings from SLDBs and FCBUs by the central government (in million US$): 627 ; ... ; 627 ; 627 ; ... ; 571 ; 627 ; 0 ; -150 ; -150 ; -150
  - External commercial loans by the central government (in million US$): 1,950 ; ... ; 1,941 ; 1,950 ; ... ; 2,482 ; 2,200 ; 1,500 ; 1,500 ; 1,500 ; 1,500
  - Proceeds from commercialization of public assets to non-residents (in million US$): 0 ; ... ; 0 ; 200 ; ... ; 0 ; 200 ; 0 ; 400 ; 400 ; 400
  - Amortization of official external debt by the central government (in million US$): 529 ; ... ; 547 ; 889 ; ... ; 959 ; 1,065 ; 365 ; 572 ; 979 ; 1,204

- Adjustor for Program NIR 2/
  - Program NIR will be adjusted upward/downward by the cumulative amounts of:
    - (i) foreign program financing by the central government;
    - (ii) net borrowings from SLDBs and FCBUs by the central government;
    - (iii) external commercial loans (including Eurobonds and syndicated loans) by the central government;
    - (iv) proceeds from commercialization of public assets to non-residents, that are higher/lower than assumed under the program;
    - and by the cumulative amount of amortization of official external debt by the central government that is lower/higher than assumed under the program.

- Notes and references to measurement (as stated in Table 1 footnotes)
  - 5/ NCOs refer to the obligation of CPC and CEB to supply fuel and electricity at administered prices. See TMU for how to measure the cost of NCOs.
  - 4/ See TMU for details on the calculation of reserve money for the test date.
  - 3/ See the TMU for how to measure year-on-year inflation. Note June 2017 onwards the MPCC and inflation is based on the new index (2013=100).
  - 1/ The CBSL's conventional definition of net official international reserves (NIR) includes outstanding liabilities in foreign exchange swaps with domestic commercial banks. The Program NIR excludes the outstanding liabilities in foreign exchange swaps with domestic commercial banks from the CBSL's conventional NIR definition. See TMU for details.

### Prior actions and structural benchmarks (summary from Table 2)
- Prior Action
  - Submit to Parliament the 2018 budget consistent with program targets and staff recommendations. — Met
- Proposed structural benchmarks (selected)
  - Approval by cabinet of a policy note outlining key elements of amendments (or replacement) to the Monetary Law Act (MLA), in consultation with the IMF. — Target Completion Date: March 2018.
  - Cabinet to approve a debt management strategy for international sovereign bonds maturing over 2019-22. — Target Completion Date: June 2018.
  - MOF to publish a detailed IRA tax manual with practical tax and administrative examples. — Target Completion Date: January 2018.
- Existing structural benchmarks (selected)
  - Develop a roadmap for flexible inflation targeting and flexible exchange rate regime identifying timebound reform measures to be taken during the program period. — Target Completion Date: October 2017 — Met (Monetary Board approved roadmap; IMF TA mission in May 2017).
  - Submit to Parliament the 2018 budget that is in line with program targets and includes: (i) a tax expenditure statement, (ii) a plan to rationalize tax expenditures in 2018 as agreed with IMF staff, and (iii) the estimated fiscal cost of non-commercial obligations (including subsidies) for SOEs. — Target Completion Date: November 2017 — Met.
  - Submit to Parliament the 2019 budget meeting analogous requirements. — Target Completion Date: November 2018 (updated at second review).
  - Complete by MOF a diagnostic review of the VAT system. — Target Completion Date: June 2017 — Not met (implemented with delay); MOF completed the review in November 2017 with inputs from FAD TA on VAT gap analysis.
  - Adopt by MOF Inland Revenue Department compliance strategies for corporate and personal income taxes. — Target Completion Date: June 2017 — Not met; new IRA contains increased powers expected to improve compliance.
  - MOF to implement an IT-based commitment control system with commitment ceilings for line ministries for the 2018 budget. — Target Completion Date: January 2018 — Given delays, existing CIGAS system will be modified so quarterly commitment ceilings will be operational for the 2018 budget.
  - MOF to complete a report outlining the cost of non-commercial obligations for fuel and electricity. — Target Completion Date: September 2017 — Not met (implemented with delay); report published as an annex to the 2018 budget speech in November.
  - Cabinet to approve automatic fuel pricing mechanism (agreed with IMF staff) ensuring retail prices above cost-recovery levels and CPC financial position capable of covering debt service. — Target Completion Date: March 2018 — Target date reset at second review for public consultation and sequenced reforms.
  - CEB and the Public Utilities Commission (PUC) to establish a Bulk Supply Transactions Account and start using it to settle transactions as specified in the November 2015 tariff methodology. — Target Completion Date: March 2018.
  - Cabinet to approve automatic electricity pricing mechanism (agreed with IMF staff) ensuring retail prices above cost-recovery levels and CEB financial position capable of covering debt service. — Target Completion Date: September 2018 — Target date reset at second review.

- Past structural benchmarks (selected, status notes)
  - Submit to Parliament the 2017 budget in line with program targets. — November 2016 — Met.
  - Publish a tax expenditure statement as part of the official government budget. — December 2016 — Met.
  - Approve by cabinet a time-bound strategy (agreed with IMF staff) to reduce or eliminate tax expenditures. — December 2016 — Not met; partial actions taken and remaining steps built into 2018 and 2019 benchmarks.
  - Submit to Parliament a new Inland Revenue Act to simplify and broaden income tax. — March 2017 — Not met (implemented as a prior action); new IRA submitted to Parliament on July 5th satisfying prior action for second review.
  - Adopt by MOF Inland Revenue Department Key Performance Indicators on the number of risk-based VAT audit. — December 2016 — Met.
  - Adopt VAT compliance strategy including time-bound plan to implement risk-based audit. — December 2016 — Met (draft strategies developed with IMF TA, phased implementation).
  - Roll out by MOF Inland Revenue Department new IT systems (RAMIS) for major domestic taxes, including web-based tax filings. — December 2016 — Met.
  - Establish by MOF a commitment record system and quarterly expenditure commitment ceilings for the 2016 and 2017 budgets. — December 2016 — Not met (implemented partially); CIGAS modifications and manual reporting enabled monthly tracking and quarterly reporting since 2017Q2.
  - Roll out ITMIS with an automated commitment control module for Ministry of Finance and Ministry of Health. — January 2017 — Met (system fully rolled out and operated in parallel to existing IT system).
  - Cabinet to approve a resolution strategy for SriLankan Airlines. — December 2016 — Met (substantial reforms; quarterly reporting to IMF staff).
  - Record the fiscal cost of non-commercial obligations (including subsidies) for SOEs in the central government budget, starting in 2017. — November 2016 — Not met (implemented in effect for major SOEs); Statement of Corporate Intent information and SCIs for 5 large SOEs published in April 2017.

### TMU: monitoring framework and definitions (selected)
- TMU sets out framework for monitoring performance under the EFF-supported program and specifies performance criteria and indicative targets (including adjustors) for semiannual reviews; monitoring procedures and reporting requirements are specified.
- Quantitative performance criteria and indicative targets listed in Table 1 (as restated in TMU, paragraph 2):
  a) quantitative performance criterion on central government primary balance (floor);
  b) quantitative performance criterion on net official international reserves (floor);
  c) continuous quantitative performance criterion on new external payment arrears by the nonfinancial public sector and the CBSL (ceiling);
  d) monetary policy consultation clause;
  e) indicative target on central government tax revenue (floor);
  f) indicative target on reserve money of the CBSL (ceiling);
  g) indicative target on cost of non-commercial obligations for fuel and electricity (net of government transfers) (ceiling).
- Definition: central government includes line ministries, departments, and other public institutions; excludes CBSL, state-owned enterprises, parastatals and other agencies that do not receive subventions from the central government.
- Debt defined in accordance with paragraph 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements attached to Executive Board Decision No. 15688-(14/107), adopted December 5, 2014.

### Performance criterion on central government primary balance (definition and measurement)
- Primary balance of the central government on cash basis is defined as central government revenues and grants minus expenditures and net lending, plus interest payments.
- Proceeds from privatization or commercialization of public assets to residents or non-residents will not be recorded as part of central government revenues.
- Spending recorded in the period during which cash disbursements are made.
- For program monitoring, the primary balance on cash basis will be measured as the overall balance of the central government plus the interest payment of the central government.
- The overall balance of the central government is measured from the financing side as the negative of the sum of listed financing items; net borrowings refer to gross disbursements minus principal repayments.

- 2015 illustrative values (measured according to the stated method):
  - Primary balance of the central government on cash basis = Rs –241 billion.
  - Overall balance = Rs –768 billion.
  - Interest payment = Rs 527 billion.
  - Financing components in 2015:
    a) Net borrowings from issuances of Treasury Bills, Treasury Bonds, and Rupee Loans = Rs 257.6 billion.
    b) Net borrowings from Sri Lankan Development Bonds (SLDBs) and commercial borrowings including international sovereign bonds and syndicated loans = Rs 455.7 billion.
    c) Net borrowings from project and program loans = Rs 69.7 billion (after adjustment for program loans contracted and disbursed during 2014 but recorded in 2015 fiscal account (Rs 61.6 billion)).
    d) Net increases in non-market borrowings, CBSL advances, government import bills, government overdraft from the banking system, cash items in process of collection, and borrowings from offshore banking units of domestic commercial banks = Rs –10.1 billion.
    e) Net decreases in the deposit of the central government in the banking system = Rs –4.4 billion (an increase in deposit).
    f) Net borrowings from all other bonds, loans, and advances contracted by the central government = Rs –0.5 billion (net repayment).
    g) Proceeds from privatization or commercialization of public asset to residents and non-residents = Rs 0 billion.

*International Monetary Fund — Attachment II. Technical Memorandum of Understanding (excerpts) — cr1803*

### 6.      If the actual amount of gross cash disbursement of project loans in 2017 is higher than

### cr1803 - 6.      If the actual amount of gross cash disbursement of project loans in 2017 is higher than

### Primary balance adjustment for project loan disbursements (end-December 2017)
- If the actual amount of gross cash disbursement of project loans in 2017 is higher than Rs 230 billion, the floor on the primary balance of the central government for end-December 2017 will be adjusted downward by the difference between the actual amount and Rs 230 billion.
- The downward adjustment of the primary balance target will be capped at Rs 20 billion.
- If the actual amount of gross cash disbursement of project loans in 2017 is lower than Rs 230 billion, the floor on the primary balance of the central government for end-December 2017 will not be adjusted.

### Performance criterion on Net Official International Reserves (Program NIR)
- Program NIR definition: difference between (a) CBSL’s conventional NIR definition and DSTs Special Dollar, Japanese Yen, and Chinese Yuan Revolving accounts (both at market values) and (b) the CBSL’s outstanding liabilities (net short positions) in foreign exchange swaps with domestic commercial banks.
- Program NIR at end-2015 (evaluated at market exchange rates): US$ 2,893.1 million.
- Program NIR at end-2016 (evaluated at market exchange rates): US$ 2,032.1 million.
- CBSL conventional NIR (end-December 2015, market exchange rates): US$ 5,028.8 million.
- CBSL conventional NIR (end-December 2016, market exchange rates): US$ 4,529.0 million.
- CBSL outstanding liabilities in FX swaps with domestic commercial banks:
  - End-December 2015: US$ 2,135.7 million.
  - End-December 2016: $2,498.6 million.
- Determination of cumulative flows for test dates: Program NIR at the test dates and the end of the previous year are evaluated at the program exchange rates and gold price specified in paragraph 9.

### FX swaps wind-down framework
- Framework includes discontinuing provision of FX swaps on concessional terms and gradually reducing outstanding net short positions of FX swaps with commercial banks as described in the MEFP.

### Valuation rules for program monitoring (paragraph 9)
- All foreign-currency related assets and liabilities are converted into U.S. dollar terms at the exchange rates prevailed on June 30, 2017 (Table 1).
- Monetary gold valued at US$1,246.59 per troy ounce (price prevailed on June 30, 2017).

### Program NIR adjustors (paragraphs 10–11)
- If any of the following (i)-(iv) are higher/lower in U.S. dollar terms than assumed under the program (Table 2), the floor on the program NIR will be adjusted upward/downward by the cumulative differences on the test date:
  - (i) the amount of foreign program financing by the central government,
  - (ii) the amount of net borrowings from SLDBs and FCBUs by the central government,
  - (iii) the amount of external commercial loans (including international sovereign bonds and syndicated loans) by the central government,
  - (iv) proceeds from commercialization of public assets to non-residents (defined as cash receipts from the sale or lease of publicly held assets, including but not limited to publicly held land, public holdings of infrastructure or commercial real estate, and public or quasi-public enterprises).
- These adjustors apply to the NIR floor for end-December 2017 and thereafter.
- If the amount of amortization of official external debt by the central government in U.S. dollar terms—as set out in Table 2—is higher/lower than assumed under the program, the floor on the program NIR will be adjusted downward/upward by the cumulative differences on the test date.
- Official external debt definition: external debt owed to multilateral and official bilateral creditors, as defined in the 2013 External Debt Statistics: Guide for Compilers and Users.
- These amortization adjustors apply to the NIR floor for end-December 2017 and thereafter.

### Exchange rates (Rates as of June 30, 2017) — Table 1 (as specified)
- Sri Lankan Rupee per currency unit:
  - U.S. dollar153.5100
  - British pound199.9314
  - Japanese yen1.3728
  - Canadian dollar118.2757
  - Euro175.6154
  - Chinese yuan22.6789
  - SDR                                                        213.5920
- Source: CBSL and IMF.

### Program assumptions (cumulative from the beginning of the year, in million US$) — Table 2 (as specified)
- Foreign program financing by the central government: 22500 100 200
- Net borrowings from SLDBs and FCBUs by the central government: 6270 -150 -150 -150
- External commercial loans (including Eurobonds and syndicated loans) by the central government: 2,200 1,500 1,500 1,500 1,500
- Proceeds from commercialization of public assets to non-residents: 2000 400 400 400
- Amortization of official external debt by the central government: 1,065 365 572 979 1,204

### Continuous performance criterion on new external payment arrears (nonfinancial public sector and the CBSL)
- A continuous performance criterion applies to the non-accumulation of new external payments arrears on external debt contracted or guaranteed by the nonfinancial public sector and the CBSL.
- Nonfinancial public sector definition: follows the 2001 Government Finance Statistics Manual and the 1993 System of National Accounts; includes central government (as defined in paragraph 3) and nonfinancial public enterprises (boards, enterprises, and agencies in which the government holds a controlling stake).
- External payments arrears definition: debt-service obligations (principal and interest) to nonresidents that have not been paid at the time they are due, as specified in contractual agreements, subject to any applicable grace period.
- Exclusion: overdue debt and debt service obligations that are in dispute will not be considered external payments arrears for program monitoring.

### Monetary policy consultation clause (inflation measurement and consultations)
- Inflation target bands are specified in Table 1 attached to the MEFP; inflation measured by the headline Colombo Consumers Price Index (CCPI) (new CCPI index (2013=100)).
- CCPI year-on-year inflation for each test date measured as: { CCPI*(t) – CCPI*(t-12) } / CCPI*(t-12)
- Definitions:
  - t = the month within which the test date is included
  - CCPI(t) = CCPI index (all items) for month t
  - CCPI(t-k) = CCPI index (all items) as of k months before t
  - CCPI*(t) = { CCPI(t-2) + CCPI(t-1) + CCPI(t) } / 3
  - CCPI*(t-12) = { CCPI(t-14) + CCPI(t-13) + CCPI(t-12) } / 3
- Consultation triggers:
  - If observed year-on-year inflation for test date end-December 2017 or end-June 2018 falls outside the outer bands specified in Table 1 attached to the MEFP, the authorities will complete a consultation with the IMF Executive Board focusing on: (i) the stance of monetary policy and whether the Fund-supported program remains on track; (ii) the reasons for the deviation; and (iii) proposed policy response. When this consultation is triggered, access to Fund resources would be interrupted until the consultation takes place and the relevant program review is completed.
  - If observed year-on-year inflation falls outside the inner bands specified in Table 1 attached to the MEFP for test dates end-December 2017, end-March 2018, end-June 2018, end-September 2018, and end-December 2018, the authorities will complete a consultation with IMF staff on reasons for the deviation and proposed policy response.

### Indicative targets
- Indicative target on central government tax revenue:
  - Central government tax revenue = revenues from taxes collected by the central government; excludes revenues from asset sales, grants, and non-tax revenues.
  - Revenue target calculated as cumulative flow from the beginning of the year.
  - For 2015, central government tax revenue (defined in this manner) was Rs. 1,356 billion.
- Indicative target on reserve money of the CBSL:
  - Reserve money consists of currency in circulation (with banks and with the rest of the public), financial institutions’ domestic currency deposits at the CBSL, and deposits of the following government agencies: National Defense Fund (General Ledger Acc. No. 4278), Buddha Sasana Fund A/C (General Ledger Acc. No. 4279), and Road Maintenance Trust Fund (General Ledger Acc. No. 4281).
  - At end-December 2015, reserve money defined in this manner stood at Rs. 673.4 billion.
  - From December 2017 onwards, reserve money for each test date is measured as the average reserve money from 16th to end of the month.
- Adjustor for legal reserve non-compliance:
  - If any bank fails to meet its legal reserve requirement, the ceiling on reserve money will be adjusted downward to the extent of any shortfall in compliance with the requirement.
- Formula for changes in required reserve regulations (paragraph 17):
  - ΔM = ΔB0 + r0 ΔB + B0 Δr  (as presented: BrBrrBM in source)
  - Variables as given:
    - MΔ denotes the change in reserve money,
    - 0r denotes the reserve requirement ratio prior to any change;
    - 0B denotes the reservable base in the period prior to any change;
    - rΔ is the change in the reserve requirement ratio; and
    - BΔ denotes the immediate change in the reservable base as a result of changes to its definition.

### Indicative target on cost of non-commercial obligations (NCOs) for fuel and electricity (net of government transfers)
- Definition: NCOs for fuel and electricity refer to obligations of Ceylon Petroleum Corporation (CPC) and Ceylon Electricity Board (CEB) to supply fuel and electricity at prices below cost-recovery levels.
- Indicative target is set on the cost of fuel and electricity NCOs net of government transfers (costs not compensated by the central government budget).
- Measurement of cost of NCOs for fuel (each quarter): cost of sales (including fuel cost, terminal charges, transport charges, personnel cost, other operational expenses, exchange rate variation, and finance cost; excluding sales taxes) minus revenues (net of sales taxes) with regard to fuel supplies by CPC for transport, power generation, aviation, industries, kerosene and LPG, and agrochemicals.
  - If revenues (net of taxes) exceed cost of sales, cost of NCOs for fuel is zero.
  - Government transfers to cover fuel NCOs measured as central government current transfers disbursed to CPC.
- Measurement of cost of NCOs for electricity (each quarter): total expenditures (including energy purchases and allowed revenue for transmission) minus total sales revenues from 5 distribution licensees under CEB, as shown in the Bulk Supply Transaction Account managed by CEB.
  - If total sales revenues exceed total expenditures, cost of NCOs for electricity is zero.
  - Government transfers to cover electricity NCOs measured as central government current transfers disbursed to CEB.
- For program monitoring, cost of fuel and electricity NCOs net of government transfers is calculated with time-lagged quarterly aggregation:
  - For the test date of end-March 2018: NCO(2017Q4) – G(2018Q1)
  - For the test date of end-June 2018: { NCO(2017Q4) + NCO(2018Q1) } – { G(2018Q1) + G(2018Q2) }
  - For the test date of end-September 2018: { NCO(2017Q4) + NCO(2018Q1) + NCO(2018Q2) } – { G(2018Q1) + G(2018Q2) + G(2018Q3) }
  - For the test date of end-December 2018: { NCO(2017Q4) + NCO(2018Q1) + NCO(2018Q2) + NCO(2018Q3) } – { G(2018Q1) + G(2018Q2) + G(2018Q3) + G(2018Q4) }
- Variable definitions:
  - NCO(q) = cost of NCOs for fuel and electricity during quarter “q”
  - NCO_fuel(q) = cost of NCOs for fuel during quarter “q”
  - NCO_electricity(q) = cost of NCOs for electricity during quarter “q”
  - NCO(q) = NCO_fuel(q) + NCO_electricity(q)
  - G(q) = central government current transfers to CPC and CEB disbursed during quarter “q”
  - G_fuel(q) = central government current transfers to CPC disbursed during quarter “q”
  - G_electricity(q) = central government current transfers to CEB disbursed during quarter “q”
  - G(q) = G_fuel(q) + G_electricity(q)

### Data reporting requirements (frequency and deadlines)
- Sri Lanka shall provide the Fund, through reports at intervals or dates requested by the Fund, with information requested in connection with progress in achieving objectives and policies set forth in the MEFP and Letters of Intent.
- All program monitoring data provided by the Ministry of Finance and the CBSL.
- Fiscal performance data (Tables 3 and 4) furnished:
  - Within no more than five weeks after the end of each month, except:
    - Data on salaries and wages, goods and services, subsidies and transfers (and its subcomponents) furnished within no more than seven weeks after the end of each month.
    - Data on total recurrent expenditure and interest payments furnished within no more than five weeks after the end of each month.
- External and monetary targets data (Tables 5, 6, and 7) furnished within no more than three weeks after the end of each month.
- Data relating to three state-owned enterprises (Tables 8–10) furnished within no more than 2 months after the end of each quarter.
- Data for indicative target on cost of fuel and electricity NCOs (Tables 11 and 12) furnished within no more than 5 weeks after the end of each quarter.

*Source: cr1803 - 6.      If the actual amount of gross cash disbursement of project loans in 2017 is higher than (IMF PDF content).*

### 1. Total inflows

### 1. Total inflows

### Total inflows (components)
- Loans
- Program
- IMF
- Project (cash component only)
- Commercial borrowing (incl. new and rolled over SLDBs)
- Interest earnings, forex trading profits, cap gains
- Purchases of foreign exchange
- Change in balances in DST's A/Cs
  - Of which: Proceeds from commercialization of public assets
- Other inflows
- Borrowing from SLDBs
- Loans from FCBUs
- Syndicated Loans
- International Swaps/Commercial Loans/Sovereign Bonds
- OMO FX swap transactions

### Total outflows (components)
- Public Debt Service Payments
- Amortization
  - Principal (foreign loans)
  - Settlement SLDBs
  - Settlement FCBU
  - Settlement of syndicated loans
- Interest
  - Foreign loans
  - Domestic foreign currency loans
    - SWAP/Loan interest
    - ISB interest
- Payments to the IMF/ change in valuation of liabilities
- Foreign exchange sales to commercial banks
- OMO FX swap transactions

### SWAP
- Inflow
- Outflow Including Interest

### Net flow and reserve measures
- Net flow at current rates (1-2)
- Net International Reserves (at market exchange rates)
- Net International Reserves (at program exchange rates)
- Gross International Reserves (at market exchange rates)
- 1/ As agreed for the purpose of monitoring the program.

### Table headings (Gross Official Reserve Position; Government liabilities; Central Bank; Memorandum)
- Table 7. Sri Lanka: Gross Official Reserve Position 1/ (In millions of U.S. dollars)
- Gross Official Reserves
- Net International Reserves (with ACU & SWAP & without DA)
- Other Deposits
- Asian Clearing Union
- Drawings from the IMF
- International Currency Swap
- Total
- Overall balance
- Swaps with Commercial Banks
- 2nd Leg (Maturity)
- Reserves managed by IOD
- Reserve Position at I.M.F. & SDR hol.
- Crown Agent's Credit Balance
- D S T's Special Dollar Revolving Cr.balance
- DST's Yen Accounts (without ACU & DA & with Swap)
- Foreign Assets (FA) (with ACU & Without DA)
- Domestic Assets (DA) (BOC & PB)
- Memorandum Items - 1st Leg (New)
- Outstanding stock

### Financial outturns (table headings)
- Table 8. Sri Lanka: Financial Outturn of Ceylon Electricity Board 1/ (In millions of rupees)
  - Total revenue
  - Sale of electricity
  - Other income
  - Total expenditure
  - Direct generation cost
  - Generation, transmission, and distribution O&M cost
  - Corporate expenses
  - Interest on borrowings and delayed payments
  - Depreciation
  - Other cost
  - Operating profit/loss
  - Liquidity position
  - Borrowings from banks
  - Payments to banks
  - Outstanding debt to banks
  - Purchases from CPC and IPP
  - Payments to CPC and IPP
  - Outstanding to CPC and IPP
  - 1/ As agreed for the purpose of monitoring the program.

- Table 9. Sri Lanka: Financial Outturn of Ceylon Petroleum Corporation 1/ (In millions of rupees)
  - Total revenue
  - Octane 90
  - Diesel
  - Other products
  - Other income
  - Total expenditure
  - Cost of sales
  - Sales and distribution
  - Administration
  - Finance cost
  - Depreciation
  - Other cost
  - Operating profit/loss
  - Outstanding dues to state banks
  - 1/ As agreed for the purpose of monitoring the program.

- Table 10. Sri Lanka: Financial Outturn of Sri Lankan Airlines 1/ (In millions of rupees)
  - Total revenue
  - Passenger
  - Cargo
  - Other income
  - Total expenditure
  - Aircraft fuel cost
  - Employee cost
  - Other operating expenses
  - Financial cost
  - Operating profit/loss
  - Capital contribution
  - 1/ As agreed for the purpose of monitoring the program.

### Cost of Non-Commercial Obligations for Fuel (Table 11)
- Table 11. Sri Lanka: Cost of Non-Commercial Obligations for Fuel 1/ (In millions of rupees, unless otherwise noted)
- Key line items and formulas shown:
  - a=e-b
  - b=c-d
  - cd
  - e=f+g+h+i+j+k+l
  - fghi
  - j
  - kl m
- Components and metrics listed:
  - Cost of NCOs
  - Net sales revenue (net of Sales revenue Sales taxes
  - Total cost (net of sales
  - Cost of sales
  - Terminal charge
  - Transport charge
  - Personnel cost
  - Other expenses
  - Exchange rate variation
  - Finance cost
  - Sales quantity
  - Product
  - Rs millions, Million liters
- Product groupings (A–F):
  - A. TRANSPORT: Super petrol (92 octane), Unladed petrol (95 octane), Auto diesel, Super diesel
  - B. POWER GENERATION: Auto diesel, Fuel oil 800', Fuel oil 1500', Fuel oil 1500' low sulphur, Fuel oil 200', Naphtha
  - C. AVIATION: Jet A-1 (Foreign), Jet A-1 (Sri Lankan Airline), Jet A-1 (Local), Avgas
  - D. INDUSTRIES: Ind Kero, Fuel oil 800', S.B.P., Bitumen, Lubricant
  - E. DOMESTIC: Kerosene, LPG
  - F. AGRO: Agro chemicals
  - Total (A-F)
- Memorandum item: Central government current transfers to CP
- 1/ As agreed for the purpose of monitoring the program.

### Statement by Executive Director and Alternate Executive Director (December 6, 2017) — Key findings and policy points

- Program Performance
  - "Sri Lanka’s EFF program is progressing well, with all end-June 2017 Quantitative Performance Criteria (QPC) and end-September Indicative Targets (IT) having been met."
  - QPC related to the primary deficit was met.
  - NIR exceeded the target.
  - Inflation remained within the target band under the program.
  - The continuous PC of making no new external arrears was met.
  - Four of the five Structural Benchmarks (SB) to be completed by November 2017 were implemented; the missed SB on designing compliance strategies for income taxes postponed until the new Inland Revenue Act (IRA) is fully operational in 2018.
  - The prior action for the third review on submission of Budget 2018 consistent with the EFF program was completed.
  - Authorities request completion of the Third Review of the EFF.

- Economic Growth, Inflation and Outlook
  - "The Sri Lankan economy grew by 3.9 per cent during the first half of 2017, compared to the growth of 3.7 per cent over the same period of 2016, driven mainly by the expansion in Industry and Services."
  - Contraction in Agriculture-related activities due to severe drought and flood disturbances weighed on growth.
  - "Overall, the economy is expected to grow by 4.0 – 4.5 per cent in 2017."
  - Unemployment declined to 4.3 per cent in the first half of 2017, from 4.4 per cent in the corresponding period of 2016.
  - Headline inflation increased overall, driven by high food inflation, tax adjustments in 2016, and rising international commodity prices, while core inflation remained low on average.
  - Inflation likely to remain elevated in near term due to weather-related supply disruptions; expectations are to contain inflation within ranges specified in the monetary policy consultation clause of the program.

- Monetary and Exchange Rate Policy
  - Central Bank continued a tight monetary policy stance.
  - Past measures: 100 basis points (bps) increase in policy interest rates and 1.50 percentage point increase in the Statutory Reserve Ratio (SRR) in 2016.
  - Policy interest rates increased by 25 bps in March 2017.
  - Credit growth from commercial banks to the private sector decelerated to 16.2 per cent in October 2017 from 28.5 per cent in July 2016.
  - Road Map for Implementing FIT approved in October 2017 (time-bound actions, consensus on inflation target, legislative reforms, monetary policy implementation, liquidity management, market development).
  - New market-based Treasury bond auction system and proposed Liability Management Act expected to insulate monetary policy from fiscal dominance.
  - Authorities committed to a flexible exchange rate regime with intervention limited to preventing wide fluctuations and building up official reserves.
  - New Foreign Exchange Act (FEA) repealing the Exchange Control Act came into effect from 20 November 2017; Central Bank established the Department of Foreign Exchange.

- Financial Sector
  - Financial sector expanded and remained stable with higher capital, adequate liquidity buffers, and healthy earnings.
  - NPL ratio improved; bank branch network expanded.
  - Implementation of the Basel III framework is progressing.
  - Central Bank establishing a Resolution and Enforcement Department.
  - Measures to strengthen AML/CFT regime; enactment of FATF-compliant AML/CFT laws and regulations in progress.
  - Scenario-based stress testing, systemic risk survey, early warning indicators, and expansion of network analysis are being used.
  - Macroprudential tools such as LTVs on motor vehicles have been implemented.

- Fiscal Policy, New Legislations and SOE Reforms
  - "Revenue-based fiscal consolidation remains the key for improving the country’s public finances."
  - Primary balance maintained within end-June PC and end-September IT; primary balance recorded a surplus during the first 6 months, declined thereafter due to drought and flood related expenditures.
  - Government committed to reduce the deficit gradually to 3.5 per cent of GDP and debt to GDP ratio to 70 per cent from the projected 80 per cent in 2017.
  - Budget 2018 theme: "Blue-Green Enterprise Sri Lanka."
  - Projected revenue target expected to be met via IRA implementation and improved tax administration through RAMIS.
  - Measures: tax expenditure statement and statement on fuel and electricity NCOs presented in Budget 2018; submission of Quarterly Expenditure and Income Outcome Reports to Parliament.
  - Budget 2018 focuses on enhancing private sector participation, exports, digitalization, and human capital investment.
  - Proposed legislative revisions and new Acts include Liability Management Act, Public Finance Management Act, National Audit Act, Demutualization Act, Securitization Act, Development Bank Act, and Public Enterprises Act.
  - Liability Management Act priority to handle bunching of scheduled debt service payments from 2019 onwards; allow Treasury to create a buffer fund and enable use of funds from commercialization of government assets for liability management.
  - SOE reforms: pricing formulas for fuel and electricity to be determined in March and September as part of recalibrated steps; resolution strategy for SriLankan Airlines; Statements of Corporate Intent (SCIs) signed with five key SOEs in March 2017 and to be extended.

- External Sector
  - Exports recorded continuous growth since March 2017; trade deficit widened due to increased imports (petroleum for power generation and rice).
  - Earnings from tourism declined; workers’ remittances moderated.
  - Current account balance did not improve as expected; pressure on BOP eased with higher financial account inflows.
  - Sri Lankan rupee depreciated by 2.6 per cent against the US dollar so far in the year.
  - Outstanding swaps with commercial banks declined to US$ 1.8 billion by end-October 2017 from US$ 2.5 billion at end-December 2016.

- Trade and Investment Regime
  - New Trade Policy (NTP) approved in August 2017.
  - FTA with Singapore expected to be signed in January 2018.
  - National Trade Facilitation Committee established; single electronic window at Sri Lanka Customs to be operational shortly.
  - Anti-Dumping and Countervailing Measures Bill and a Safeguard Measures Bill to be presented to Parliament.
  - Budget 2018 proposals include abolishing para-tariffs on selected lines; "Export Market Access Support" program; trade portal; product development assistance; "Multi-National Corporation Outreach"; automating import documentation.

- Technical Assistance
  - Authorities value continued IMF technical assistance and expect to continue engagement.

### Conclusion (authorities' view)
- "With the help of strong policy initiatives, complemented by the measures taken under the EFF, macroeconomic stability is being gradually restored in Sri Lanka, while achieving a satisfactory level of economic growth."
- S&P revised Sri Lanka’s sovereign rating outlook from negative to stable on 20 November 2017.
- Authorities committed to continuing structural reforms and building buffers to improve resilience; expectation that Sri Lanka will return to a high and inclusive growth trajectory, supporting employment generation and higher incomes.

*Source: cr1803 - 1. Total inflows (IMF staff report and accompanying tables).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr1803.pdf_