## 1lkaea2025001-print-pdf ## Source details **Canonical URL:** [1lkaea2025001-print-pdf](https://www.imf.org/-/media/files/publications/cr/2025/english/1lkaea2025001-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1lkaea2025001-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1lkaea2025001-print-pdf.pdf.json) --- ### Executive summary — context and recent developments - Political transition in late 2024: Anura Kumara Dissanayake (NPP) won September 21 presidential election, assumed Finance Minister responsibility, dissolved parliament, called legislative elections on November 14; NPP gained a two‑third majority. - Authorities committed to program objectives while seeking some fiscal adjustments (¶9). - By end-2024, real GDP recovered about 40 percent of the loss incurred between 2018 and 2023. - Real annual GDP growth: 5.5 percent in 2024Q3; averaged 4.3 percent since growth resumed in 2023Q3. - Headline inflation: entered temporary deflation from September 2024; December 2024 headline inflation -1.7 percent; core inflation 2.7 percent. - Gross official reserves: US$6.1 billion (50.3 percent of the ARA metric) by end-December 2024 after net FX purchases of US$2.8 billion. - Nominal exchange rate: appreciated by 10.6 percent through end-December 2024; REER appreciated by 4.6 percent through October 2024. - Primary surplus (end-2024): Rs. 653.5 billion (2.2 percent of GDP). - Financial sector: nominal credit growth 9.3 percent y/y by end-October 2024; system-wide capital adequacy ratio 18.5 percent (2024Q3); NPLs 12.6 percent; T-bill yields declined from 14 percent (early 2024) to 9 percent (December 2024). - Eurobond spreads: fell from weighted average 1,900 bps pre-restructuring to around 520 bps mid-January on a non-macro-linked bond (2035 maturity with governance-linked features); coupon could be reduced by 75 basis points if governance-linked conditions met. ### Outlook, risks, and risk management - Growth outlook: 2024 growth revised up from 2.0 to 4.5 percent. - Inflation outlook: average inflation expected to gradually return to the 5 percent target; small uptick toward end-2025 due to base effects, import restriction relaxation, and stronger demand. - External outlook: stronger current account balances for 2024-26 from tourism and remittances. - Key risks: - Reform fatigue could slow fiscal reform momentum after debt restructuring. - Fiscal risks if cost-recovery energy pricing not restored. - Social tensions from perceptions of unmet campaign promises. - External risks: intensifying geopolitical tensions, commodity price volatility, global slowdown. - Risk management: maintain agile policies and contingency measures; lock in overperformance where possible. ### Program status, financing, and conditionality - On completion of the third review, access to additional SDR 254 million; total disbursements under the EFF would reach SDR 1.016 billion. - Staff recommends completing the MPCC consultation and the financing assurances review. - New and modified quantitative targets and Structural Benchmarks (SBs) proposed through December 2025. - Program financing: program is fully financed with firm IFI commitments for next twelve months; PBoC swap renewed to December 2027. - External financing table highlights (selected): Total 2022-27 Financing Gap (A) = -25,661 (millions USD); Program Financing (B) total = 25,661 (millions USD); IMF EFF = 3,037 (millions USD). - Capacity to repay the Fund: Fund credit outstanding would peak at 3.4 percent of GDP in 2027; EFF repurchases and charges peak in 2031 at 2.2 percent of goods and services exports. ### Program performance and monitoring - Overall: all end-December QPCs and standard continuous PCs met except the MPCC and the IT on social spending. - Fiscal QPCs and ITs (selected outturns vs. QPCs): - End-December primary surplus: Rs. 653 billion vs. QPC of Rs. 300 billion. - End-June primary surplus: Rs. 543 billion vs. QPC of Rs. 140 billion. - End-December tax revenues: Rs. 3,705 billion vs. QPC floor of Rs. 3,700 billion. - End-June tax revenues: Rs. 1,709 billion vs. QPC floor of Rs. 1,500 billion. - Social spending IT missed: June Rs. 128 billion vs. IT Rs. 150 billion; December Rs. 186 billion vs. IT Rs. 205 billion. - Monetary and reserves targets: end-June and end-December NIR QPCs exceeded by US$1.3 billion and US$1.5 billion, respectively. - MPCC: headline inflation in Q2 and Q4 was 1.4 and -1.5 percent respectively, below MPCC outer lower band of 2 percent—triggered MPCC consultation with the IMF Executive Board. - Continuous PCs met: no new external payment arrears and no CBSL purchases in primary market. ### Fiscal policy, 2024 outturn and 2025 budget stance - Primary balance (QPC) for 2024: surplus 2.2 percent of GDP vs. second review envisaged 1.0 percent of GDP. - Capital spending under-execution: lower by 1.4 ppt of GDP relative to the second review. - Draft 2025 Budget targets primary surplus 2.3 percent of GDP. - Total revenue forecast: about 15 percent of GDP in 2025. - Primary spending forecast: 12.8 percent of GDP (consistent with 13 percent ceiling in new PFM law). - Key fiscal figures (percent of GDP, source table entries preserved): - Total Revenue and Grants: Second review 13.6, Baseline 13.7; Third review baseline 15.1, Baseline 15.1. - Tax Revenue: 12.4 → 12.4; 13.9 → 13.9. - Primary spending: Second review 12.5, Baseline 11.5; Third review 12.8, Baseline 12.8. - Interest payments: 8.4 → 7.8; 7.5 → 7.7. - Capital Expenditure and Net Lending: 4.0 → 2.6; 4.4 → 3.7. - Overall balance (program definition): (7.3) → (5.6); (5.2) → (5.4). - Primary balance (program definition): 1.0 → 2.2; 2.3 → 2.3. - Nominal GDP: 2024: 30,917 and 29,893 (two series shown); 2025: 33,958 and 32,309 (two series shown). ### Revenue package, tax measures, and compliance actions - Tax revenue target 2025: 13.9 percent of GDP (QPC); gross revenue gains needed 1.6 percent of GDP; net gains 1.5 percent of GDP. - Revenue package highlights (measures): - Introduce VAT on supply of digital services. - Introduce CIT rate of 15 percent on services exports. - Increase CIT on betting and gaming, tobacco, and liquor from 40 percent to 45 percent. - Increase withholding tax on interest income from 5 to 10 percent. - Gazette notification to introduce import duty on motor vehicles and regulations eliminating import restrictions on motor vehicles. - Measures requiring legislative action: 0.4 percent of GDP; gazette notifications: 1.2 percent of GDP. - Lifting import restrictions gains estimated at 1.2 percent of GDP, broken down: - Increase in VAT on imports: 0.3 percent of GDP. - Increase in excises on motor vehicles: 0.3 percent of GDP. - Increase in external trade taxes from pent-up demand: 0.4 percent of GDP. - Introducing 30 percent import duty on motor vehicles: 0.2 percent of GDP. - VAT compliance projected gains revised down: 0.1 percent of GDP (2025) vs. 0.3 percent previously. - VAT compliance gap estimated at least 1 percent of GDP; additional 0.1 percent of GDP compliance gains incorporated in 2026. - New SB: IRD to prepare and publish a VAT compliance improvement program by May 2025. - SVAT repeal prerequisites: fix VAT refund system; IRD to report simulation exercise results by end-June 2025; SVAT abolition by end-September 2025 (reset SB). ### Spending priorities, social protection, and PFM reforms - Primary spending increase to 12.8 percent of GDP in 2025 accommodates relief measures including capital spending and public wages (0.3 percent of GDP) and an interest rate subsidy for senior citizens (3 percent subsidy from July 2025 for six months). - Half-year cost of interest subsidy estimated at 0.1 percent of GDP in 2025 (slightly higher than Budget allocation of 0.05 percent of GDP). - End-2025 SSN spending floor raised to Rs. 237 billion. - Aswesuma program: expedite opening outstanding bank accounts and resume second round applications—expected completion by mid-2025. - PFM SBs and TA: - Publish medium-term PFM reform strategy and action plan by June 2025. - Publish fiscal risk statement by June 2025. - Adopt implementing regulations of new PFM law by December 2025. - ITMIS completion expected in May 2025; integrate with e-procurement. ### Energy sector, electricity pricing, and fiscal risks - Continuous SB on cost-recovery electricity pricing breached after a 20 percent tariff reduction on January 17, 2025. - Electricity tariffs had been reduced 39 percent cumulatively in March and July 2024; regulator cut a further 20 percent on January 17, 2025. - CEB legacy debt: around Rs. 301 billion as of end-September 2024; cabinet approved repayment schedule on February 10, 2025 (SB); repayments start in April 2025 and included in tariff calculations. - BSTA mechanism: automatic adjustment to tariffs when CEB cash balances reach lower threshold; April tariff revision expected to restore cost recovery if BSTA-triggered adjustment insufficient. - Continuous SBs: set retail fuel prices to cost-recovery monthly; maintain electricity tariff at cost-recovery with quarterly formula-based adjustments (Jan 1, Apr 1, Jul 1, Oct 1). ### Debt restructuring, domestic operations, and public debt management - December Eurobond exchange: 98 percent participation following activation of collective action mechanisms. - Agreements completed with China Development Bank (CDB) and China EXIM Bank; payments resumed on restructured facilities (China EXIM in July 2024; CDB payments started December 2024). - Domestic Debt Operation (DDO) mostly concluded in 2023: maturity extensions, exchange of FX SLDBs to local currency, exchange of T-bills held by CBSL into long-term T-bonds. - Banking system absorption of government debt: ~39 percent of banking system assets end-2023; expected ~42 percent by end-2024. - PDM Act implementation steps and deadlines: - Adopt PDM Act implementing regulations by March 2025. - Parliament to repeal the Foreign Loans Act by April 2025 (new SB). - Publish MTDS and ABP with the 2026 Budget. - Restructuring coverage: agreements in principle on ~97 percent of restructuring perimeter. - NPV relief from restructuring: 41 percent NPV/NPV relief for total restructured external debt (baseline MLBs); 37 percent in highest growth state. ### State-contingent instruments (SCDIs/MLBs) and SRDSA methodology - SCDIs (MLBs) included in bond treatment; staff assessed September 18 AIP consistent with debt sustainability targets. - Staff methodology to assess SCDI risks: - Tests if adding SCDIs increases likelihood of exceeding debt targets. - Checks that SCDI triggers link to real improvements in debt carrying capacity. - Assesses downside scenarios and tail risks; SCDIs feature caps limiting extreme payments. - SRDSF debt fan chart module used to compare scenarios with and without SCDIs. ### Monetary policy, inflation, and CBSL stance - CBSL policy actions in 2024: policy rate cuts of 50 bps (March), 25 bps (July), and 50 bps (November); moved to a single policy rate in November 2024. - Forward-looking real rate close to neutral estimate (2.5 percent); Taylor-rule models imply little room for further cuts unless inflation continues to surprise on the downside. - CBSL refrains from monetary financing; offloaded T-bill holdings; NCG ceiling maintained until December 2025 (QPC). - Inflation path: headline inflation projected to turn positive mid-2025 and converge to 5 percent thereafter. - CBSL stands ready to tighten monetary stance if inflationary pressures materialize from wages, demand recovery, import restriction relaxation, or exchange-rate passthrough. ### Financial sector stability and NPL resolution - Banking sector recapitalization: recapitalization plans for private banks implemented; private banks met minimum capital requirements by end-2024. - CBSL enacted Banking (Amendment) Act June 15, 2024; published related regulations and corporate governance directions (September 2024). - NPLs: 12.6 percent (Q2 2024); priority to resolve NPLs via parate executions (new SB, June 2025) and Rescue, Rehabilitation, and Insolvency Act reforms. - Resolution framework: Banking (Special Provisions) Act introduced in September 2023; CBSL to adopt policies, manuals, regulations, and prepare resolution plans. ### Governance, anti-corruption, and institutional reforms - Progress: publication of asset declarations for 200 senior officials; CIABOC Director-General appointed January 10, 2025; strategic plan to be published by mid-March 2025. - CIABOC next steps (SBs/new SBs): public access to asset declarations, publish remaining declarations and non-filers, revise declaration form for beneficial ownership, modify redaction rules, enact comprehensive Asset Recovery Law by end-April 2025 (reset SB). - Tax policy/incentives commitments: refrain from new exemptions or incentives; submit amendments to SDP Act to introduce transparent, rules-based eligibility criteria by end-August 2025 (reset SB); extend coverage of tax exemption publications to Port City Act (revised SB). - PFM and procurement: pilot e-procurement tender in March 2025; enact Public Procurement Law by end-June 2025; ensure audited financial statements for 52 major SOEs published by end-June of following year. ### Social safety nets, Aswesuma, and protection measures - Aswesuma coverage increased to 1.7 million households end-2024 (25.6 percent of population) vs. poverty rate 23.4 percent. - Social spending ITs missed in 2024 due to technical account opening issues and election timing; remedial measures mobilized. - 2025 commitments: - Maintain Aswesuma coverage above poverty rate. - Full onboarding of second-round beneficiaries by June 2025. - Parliamentary approval to increase monthly transfers: Poor +Rs. 1,500 from January 2025; Extremely poor +Rs. 2,500 from January 2025; Elderly +Rs. 2,000 from April 2025; Disabled and chronic kidney patients +Rs. 2,500 from April 2025. - Expect number of Aswesuma households 1.6 million by end-2025 (24.4 percent of population) vs. poverty rate 21.3 percent. - Cumulative social spending to increase to Rs. 237 billion in 2025. ### Structural reforms and growth agenda - Priorities: trade liberalization, investment climate improvements, labor market reforms, SOE efficiency, climate resilience. - Specific measures: rationalize para-tariffs; implement National Export Strategy; expedite FTAs; unify labor laws into Employment Law; Women’s Empowerment Act enacted July 2024. - SOE reforms: improve financial viability in electricity and airline sectors; ensure regular audited financial statements; draft SOE law with World Bank assistance. - Climate: enhance renewable electricity generation and engage multilateral partners for capacity development. ### Risk assessment and contingency framework - Domestic risks (selected): - Program financing risks: Likelihood High; Expected Impact H; Policy Response includes higher IFI financing, deeper restructuring, frontloaded revenue measures. - Waning reform momentum: Likelihood High; Expected Impact H; Policy Response: corrective actions, prioritize reforms, frequent engagement. - Social unrest: Likelihood Medium; Expected Impact M; Policy Response: inclusive reforms, strengthen communication. - External risks (selected): - Regional conflicts and commodity volatility: Likelihood High; Expected Impact H for trade and inflows; Policy Response: monetary/fiscal support, exchange rate adjustment, external financing. - Global slowdown: Likelihood Medium; Expected Impact M; Policy Response: easing monetary policy and targeted fiscal support as needed. - Contingency measures: prioritize revenue administration reforms, targeted spending cuts as last resort, tighten monetary policy if inflation upside materializes, consider explicit FX intervention rules if reserves buildup slips. ### Monitoring, reporting, and TMU highlights - TMU quantitative performance criteria and indicative targets include: - Central government primary balance (floor). - Central government tax revenue (floor). - Stock of expenditure arrears (ceiling). - Program NIR (floor). - CBSL net credit to government (NCG) (ceiling). - Continuous PC: no new external payment arrears; no CBSL primary market purchases. - MPCC bands: center 5.0; inner band ±1.5 (upper 6.5, lower 3.5); outer band ±3 (upper 8.0, lower 2.0). - Indicative targets: social safety net spending (floor); cost of NCOs for fuel and electricity (ceiling); treasury guarantees (ceiling); FX treasury guarantees (ceiling). - Program exchange rates table (rates as of January 3, 2023) includes Sri Lanka rupee 363.11 and gold price US$/oz 1831.62 (memorandum). - Data reporting timelines specified (monthly, quarterly, weekly as applicable); detailed bank-by-bank monitoring templates required. ### Staff appraisal and recommendations - Staff view program performance as strong; recovery underway with contained inflation, reserve accumulation, improved fiscal performance, and progress on debt sustainability. - Recommendations/priorities: - Maintain revenue-based fiscal consolidation and implement revenue measures and compliance reforms. - Reinstating cost-recovery electricity prices without delay to curb SOE fiscal risks. - Prioritize spending under fiscal rules and smooth capital spending execution. - Monitor interest subsidy scheme spending to avoid bank spillovers. - Continue to refrain from monetary financing, allow exchange rate flexibility, and phase out remaining BOP restrictions gradually. - Reinforce NPL resolution, insolvency framework, and governance reforms. - Staff supports completion of the Third Review, modification of quantitative conditionality, completion of MPCC consultation, and financing assurances review. *Source: EXECUTIVE SUMMARY — 1lkaea2025001-print-pdf* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - In late 2024, Sri Lanka underwent a political transition with presidential and parliamentary elections. Anura Kumara Dissanayake (NPP) won the September 21 presidential election, assumed Finance Minister responsibility, dissolved parliament, and called legislative elections on November 14, in which NPP gained a two-third majority. - The new authorities expressed commitment to the program objectives and targets while seeking some adjustments of fiscal measures in line with their priorities (¶9). - By end-2024, Sri Lanka’s real GDP is projected to have recovered about 40 percent of its loss incurred between 2018 and 2023. ### Recent macroeconomic developments - Growth and activity - Real annual GDP growth reached 5.5 percent in 2024Q3 and averaged 4.3 percent since growth resumed in 2023Q3. - High frequency indicators point to continued expansion across all sectors. - Inflation and prices - Year-on-year headline inflation entered temporary deflation starting September 2024 driven by large electricity tariff cuts (39 percent cumulatively in March and July), favorable fuel prices, exchange rate appreciation, and improved domestic supply conditions. - In December 2024 year-on-year headline inflation fell to -1.7 percent while core inflation remained positive at 2.7 percent. - External sector and reserves - Following net FX purchases of US$2.8 billion, gross official reserves reached US$6.1 billion (50.3 percent of the ARA metric) by end-December 2024. - The nominal exchange rate appreciated by 10.6 percent through end-December 2024; the REER appreciated by 4.6 percent through October 2024. - Current account improved with buoyant tourism, strong remittances, and a narrower-than-projected trade deficit due to weaker imports. - Fiscal performance - A primary surplus of Rs. 653.5 billion (2.2 percent of GDP) at end-2024 reflected subdued spending and sustained revenue mobilization. - Financial sector and credit - Nominal credit growth accelerated to 9.3 percent y/y by end-October 2024. - As of 2024Q3, system-wide capital adequacy ratio was 18.5 percent. - NPLs were 12.6 percent. - T-bill yields declined from 14 percent in early 2024 to 9 percent in December 2024. - Spreads on Eurobonds fell from a weighted average of 1,900 bps prior to the restructuring to around 520 bps in mid-January on the non-macro-linked bond (2035 maturity with governance-linked features). The 520 bps spread may overstate sovereign risks slightly since coupon rates could be reduced by 75 basis points if governance-linked conditions are met. ### Outlook and risks - Outlook - 2024 growth is revised up from 2.0 to 4.5 percent to reflect the stronger outturn. - Average inflation is expected to gradually return to the 5 percent target. - A small uptick in year-on-year inflation is expected towards end-2025 given base effects, relaxation of import restrictions, and stronger demand. - Stronger current account balances for 2024-26 reflect continued improvement in tourism and remittances. - Risks - Reform fatigue could slow fiscal reform momentum after debt restructuring. - Fiscal risks could materialize if cost-recovery energy pricing is not restored. - Potential perceptions of unmet campaign promises and reform fatigue could reignite social tensions. - External risks include intensifying geopolitical tensions, commodity price volatility, and a global slowdown. - Risk management - Policies should remain agile with contingency measures, including locking in overperformance. Upside risks include program overperformance and larger-than-expected inflows following the debt restructuring. ### Program status and modalities - On completion of the third review, Sri Lanka would have access to an additional SDR 254 million, bringing total disbursements to SDR 1.016 billion under the Extended Fund Facility (EFF) Arrangement. - Staff recommends the Board completes the required Monetary Policy Consultation Clause (MPCC) consultation and the financing assurances review. - New and modified quantitative targets and Structural Benchmarks (SBs) until December 2025 are proposed. ### Program performance - Overall performance - Program performance was strong with all end-December Quantitative Performance Criteria (QPCs) and standard continuous Performance Criteria met except the MPCC and Indicative Target (IT) on social spending. - By end-January 2025, most continuous SBs and other SBs were either met or implemented with a delay. - The prior action (PA) on lifting import restrictions is met and two more PAs on the 2025 draft budget and underlying revenue measures are on track. - Fiscal QPCs and ITs - End-December primary surplus: Rs. 653 billion vs. QPC of Rs. 300 billion. - End-June primary surplus: Rs. 543 billion vs. QPC of Rs. 140 billion. - End-December tax revenues: Rs. 3,705 billion vs. QPC floor of Rs. 3,700 billion. - End-June tax revenues: Rs. 1,709 billion vs. QPC floor of Rs. 1,500 billion. - IT on social spending missed: June Rs. 128 billion vs. IT of Rs. 150 billion; December Rs. 186 billion vs. IT of Rs. 205 billion. - Monetary, reserves, and MPCC - Headline inflation in Q2 and Q4 was 1.4 and -1.5 percent respectively, below the MPCC outer lower band of 2 percent, triggering an MPCC consultation with the IMF Executive Board. - End-June and end-December QPCs on CBSL primary market purchases of government securities and Net Credit to Government (NCG) were met with no new monetary financing and continued T-bill offloading. - End-June and end-December Net International Reserves (NIR) targets were exceeded by US$1.3 billion and US$1.5 billion, respectively. - Structural Benchmarks (SBs) - Most SBs due by end-January 2025 were met or implemented with delay; missed SBs (often due to the electoral cycle) are either remedied through corrective actions or proposed to be reset. - Fiscal SBs: continuous SB on ensuring cost-recovery fuel prices met; electricity price SB breached in January and expected to be remedied within existing regulatory framework (¶16). - Budgetary SBs: two SBs on revenue measures (end-June and end-July) were missed due to election timing, with remedial measures taken or underway. End-October SB on budget submission implemented with delay; end-December SB on budget approval was missed and remedial measures proposed. Parliament approved a “Vote on Accounts” for January-April 2025, with new Budget approval expected by March 2025. - Reporting SBs: reporting of end-September KPIs was missed due to data extraction difficulties. - Financial SBs: Banking (Amendment) Act enacted on June 15 and implementation rules published. Recapitalization plans for private banks implemented; all met minimum capital requirements by end-2024. Agreements reached with State-Owned Banks (SOBs) on the CPC FX loan restructuring, but reclassification of agreed cash payment in the budget faced election-related delays, causing SB on bank recapitalization to be met with delay. - Governance and anti-corruption SBs: SBs on public procurement contract publication, asset declaration, and revenue agencies’ anti-corruption plans were met. SB on publication of CIABOC’s new strategic plan and corresponding budget will be implemented with a delay by mid-March due to elections and a recent appointment. SB on enacting a comprehensive Asset Recovery Law was missed and reset to end-April 2025. ### Policy discussions (high-level themes) - A. Maintaining Revenue-Based Fiscal Consolidation and Fiscal Structural Reforms - A lower spending execution in 2024 implies a tighter fiscal stance in 2024 than envisaged at the second review. - Sustained revenue mobilization efforts have brought tax revenue up (details continue in the main report). - B. Restoring Debt Sustainability - Restoration of debt and external sustainability depends on continued implementation of reforms. - C. Maintaining Price Stability and Restoring External Sustainability - Continued vigilance on monetary policy and FX management is warranted given recent disinflation/deflation episodes and reserve accumulation. - D. Ensuring Financial Sector Stability - Addressing legacy NPLs and improving debt collection mechanisms are important to support credit growth. - E. Strengthening Governance and Reducing Corruption Vulnerabilities - Progress on procurement publication, asset declaration, and anti-corruption plans noted; some governance SBs delayed and reset. - F. Raising Potential Growth - Policies to raise potential growth are part of the agenda (detailed measures in the main report). ### Program risks and recommendations - Risks to program financing have declined with the improved external outlook, but risks to implementation remain high given the possibility of reform fatigue. - Contingency plans are important, and policies should remain agile to adjust to evolving circumstances. - Staff recommends completing the MPCC consultation and the financing assurances review as part of the third review process. *Source: EXECUTIVE SUMMARY — 1lkaea2025001-print-pdf* ### 9.8 percent of GDP in 2023 to the target of 12.4 percent of GDP this year. Due to a sizeable ### Sri Lanka: Fiscal and Macroeconomic Update (extract) ### Fiscal outturns and 2025 budget stance - Primary balance (QPC) for 2024 registered a surplus of 2.2 percent of GDP versus the second review envisaged 1.0 percent of GDP. - Capital spending under-execution contributed to the larger-than-expected primary surplus; capital spending was lower by 1.4 ppt of GDP relative to the second review. - Primary current spending was higher than expected at the second review by 0.4 ppt of GDP due to temporary subsidy schemes adopted as of October 2024 targeting farmers and fishing boat owners. - The draft 2025 Budget targets a primary surplus of 2.3 percent of GDP (QPC and text table). - Total revenue is forecast at about 15 percent of GDP in 2025 after implementing tax relief and compensating measures. - Primary spending is forecast at 12.8 percent of GDP, consistent with the 13 percent ceiling in the new Public Financial Management (PFM) law. - The Appropriation Act is expected to be approved by parliament by end-March 2025 (reset SB). Key fiscal figures (percent of GDP): - Total Revenue and Grants: Second review 13.6, Baseline 13.7; Third review baseline 15.1, Baseline 15.1. - Total Revenue: 13.5 → 13.5; 15.0 → 15.0. - Tax Revenue: 12.4 → 12.4; 13.9 → 13.9. - Primary spending: Second review 12.5, Baseline 11.5; Third review 12.8, Baseline 12.8. - Current Expenditure: 8.5 → 8.9; 8.3 → 9.0. - Interest payments: 8.4 → 7.8; 7.5 → 7.7. - Capital Expenditure and Net Lending: 4.0 → 2.6; 4.4 → 3.7. - Overall balance (program definition): (7.3) → (5.6); (5.2) → (5.4). - Primary balance (program definition): 1.0 → 2.2; 2.3 → 2.3. - Nominal GDP: 2024: 30,917 and 29,893 (two series shown); 2025: 33,958 and 32,309 (two series shown). - Total revenue gains: 2.6, 2.5, 1.5, 1.5 (memo entries across columns). ### Revenue measures, tax package, and compliance - Tax relief will be introduced in 2025 to account for cumulative inflation impact; these reliefs will be compensated by revenue measures to meet revenue targets. - To reach a tax revenue target of 13.9 percent-of-GDP for 2025 (QPC), gross revenue gains of 1.6 percent of GDP are needed (text table); net gains are 1.5 percent of GDP after accounting for measures that cause revenue losses. - Revenue package (PA) retains most second-review measures and includes: - Introduce VAT on the supply of digital services. - Introduce a Corporate Income Tax (CIT) rate of 15 percent on services exports. - Increase the CIT rate on betting and gaming, tobacco, and liquor industries from 40 percent to 45 percent. - Increase the withholding tax rate on interest income from 5 to 10 percent. - Gazette notification to introduce an import duty on motor vehicles and regulations eliminating import restrictions on all motor vehicles. - Measures requiring legislative action account for 0.4 percent of GDP; measures requiring a gazette notification account for 1.2 percent of GDP. - Gains from lifting import restrictions are estimated at 1.2 percent of GDP, broken down as: - Increase in VAT on imports: 0.3 percent of GDP. - Increase in excises on motor vehicles: 0.3 percent of GDP. - Increase in external trade taxes from pent-up demand: 0.4 percent of GDP. - Introducing an import duty of 30 percent on motor vehicles: 0.2 percent of GDP. - VAT compliance projected gains were lowered relative to the second review: 0.1 percent of GDP versus 0.3 percent of GDP previously, reflecting slow reforms. - The VAT compliance gap was estimated to be at least 1 percent of GDP; an additional 0.1 percent of GDP in compliance gains is incorporated in 2026. - The IRD will prepare a VAT compliance improvement program and publish it by May 2025 (new SB); the program will identify, assess, and prioritize compliance risks and formulate a detailed plan. - Expedited efforts to fix the VAT refund system are required as a prerequisite to abolish the SVAT by end-September 2025 (reset SB); the IRD will report results of a simulation exercise of new refund arrangements before end-June 2025 (new SB). ### Spending priorities, social protection, and PFM reforms - The increase in primary spending from 12 to 12.8 percent of GDP in 2025 accommodates relief measures including: - Increases in capital spending and public wages (0.3 percent of GDP). - An interest rate subsidy of 3 percent from July 2025 for six months for senior citizens above 60 years with one-year term deposit account balances below Rs. 1 million. - The additional half-year cost of the interest subsidy is estimated at 0.1 percent of GDP in 2025 (slightly higher than the Budget’s allocation of 0.05 percent of GDP). - End-2025 SSN spending floor was raised to Rs. 237 billion. - Measures to address Aswesuma program IT underperformance included expediting opening of outstanding bank accounts and resuming the second round of applications, expected to be completed by mid-2025. - PFM reforms supported by IMF TA and deadlines: - Develop and publish a medium-term PFM reform strategy and action plan by June 2025. - Develop and publish the fiscal risk statement by June 2025. - Adopt implementing regulations of the new PFM law by December 2025. - Any future PFM-related bill (e.g., PPP, SOE, procurement, investment) should be consistent with the PFM law. ### Electricity pricing and fiscal risks - Cost-recovery electricity pricing is no longer maintained and must be restored (continuous SB). - Electricity tariffs were reduced by 39 percent cumulatively in March and July due to lower international fuel prices and strong rainfall, allowing CEB profits in parts of 2024 and some legacy debt repayment. - A downward tariff revision of 20 percent implemented by the regulator on January 17 resulted in the SB not being met; CEB is expected to start making losses in coming months. - Authorities committed to ensure the Bulk Supply Transaction Account (BSTA) operates with an automatic adjustment once CEB cash balances reach the lower threshold; April tariff revision will be used to adjust tariffs to cost recovery if BSTA-triggered adjustment is insufficient. ### Debt restructuring and debt management - The December Eurobond exchange was successfully completed with 98 percent participation following activation of collective action mechanisms, in line with Agreements in Principle (AIPs). - Authorities completed debt treatment with China Development Bank (CDB) in line with program parameters and comparability of treatment (COT) as assessed by the OCC. - Authorities fully completed restructuring with China EXIM Bank in July and are finalizing individual agreements with OCC creditors. - Outstanding steps: finalize bilateral OCC agreements and reach agreements with remaining commercial and official creditors; staff remains confident these processes will conclude in 2025. - Public Debt Management (PDM) Act implementation steps and deadlines: - Adopt PDM Act implementing regulations by March 2025. - Parliament to repeal the Foreign Loans Act by April 2025 (new SB). - Formulate a medium-term debt strategy and annual borrowing plan to be published with the 2026 Budget. ### Monetary policy and inflation - Monetary policy normalization: CBSL cut the policy rate by 50 basis points in March, 25 basis points in July, and another 50 basis points in November. - Inflation trends: - Headline inflation dropped below the outer band of the MPCC starting in 2024Q2 and turned negative starting in September. - Core inflation and inflation expectations declined to 3 percent since October. - Deflation attributed to temporary factors expected to dissipate in early 2025 as energy price effects run their course, import restrictions are removed, and demand recovers. *Source: IMF staff report extract (PDF chapter).* ### 21. The CBSL stands ready to tighten the monetary stance as needed. With inflation ### 1lkaea2025001-print-pdf - 21. The CBSL stands ready to tighten the monetary stance as needed. With inflation ### Monetary policy stance and inflation - Inflation projected to gradually return to the 5 percent target in 2025. - Forward-looking real rates are close to the neutral rate estimate (2.5 percent). - Taylor rule models imply little room for further rate cuts unless inflation continues to surprise on the downside. - The CBSL stands ready to tighten the monetary stance as needed and will monitor inflationary pressures that could arise from wage increases, demand recovery, relaxation of import restrictions, and exchange-rate passthrough. - The CBSL moved from a dual rate system to a single policy rate in November; the new single rate policy is close to the mid-corridor rate and the width of the corridor remains unchanged. - The CBSL continues to refrain from monetary financing (continuous QPC) and has reduced holdings of government securities by fully offloading CBSL holdings of T-Bills (QPC). - The NCG ceiling is maintained at the same level until December 2025 (QPC) given uncertainty over market liquidity and marketability of the restructured domestic bonds. ### External adjustment, reserves, and exchange-rate policy - Authorities plan to continue building up reserves through outright purchases, targeting a positive NIR by end-2025 (QPC). - Continued allowance of exchange rate flexibility. - Relaxation of vehicle import restrictions: - public transport vehicles in December 2024, - commercial and special purpose vehicles on January 27, 2025, - personal vehicles on January 31, 2025 (except for a few categories for environmental and safety reasons). - Introduction of an import duty to help moderate the impact on the exchange rate. - With these relaxations, all import restrictions put in place over 2020-22 have been removed. - Progress made on phasing out remaining exchange restrictions and CFMs. - Sri Lanka maintains two MCPs arising from: (i) a 2.5 percent stamp duty on credit card transactions abroad; and (ii) a 14 percent remittance tax on nonresidents’ profits. ### Financial sector stability and nonperforming loans (NPLs) - Initial EFF program phase focused on restoring banks’ capital and liquidity and enhancing supervisory and regulatory standards. - Current priority: resolve NPLs to promote healthy credit growth and enable banks to lend to the private sector. - Reinstating parate executions (new SB, June 2025), especially for large borrowers in default more than five years, combined with reform of corporate and personal bankruptcy regimes via the Rescue, Rehabilitation, and Insolvency Act, will support NPL recovery and capital reallocation. - Resolution framework introduced in September 2023 through the Banking (Special Provisions) Act; CBSL still needs to adopt necessary policies, manuals, regulations, and prepare resolution plans. - Amendments to the Banking Act enacted on June 15, 2024, improved regulatory, supervisory and governance standards, especially for SOBs; CBSL published associated regulations imposing fit-and-proper requirements. - CBSL issued Banking Act Directions on Corporate Governance for Licensed Banks in September 2024; SOB Board compositions changed in December so independent directors comprise a majority. ### Governance, anti-corruption, and public financial management (PFM) - Continuing comprehensive anti-corruption and governance reforms is critical; authorities’ action plan on governance reforms will be updated and published annually (new SB). - CIABOC actions and priorities: - Appointed a new Director-General and will publish its new strategic plan in March. - Key next steps: (i) allow public access to published asset declarations through foreign and local phone numbers or email accounts and downloadable posted forms; (ii) publish remaining asset declarations of senior officials along with list of non-filers; (iii) revise declaration form to include beneficial ownership information; (iv) modify redaction rules so information on the value of bank accounts and other assets is disclosed to public (new SB); and (v) enact a comprehensive Asset Recovery Law to harmonize with the UNCAC (reset SB). - AML/CFT: authorities committed to amending the Companies Act to align beneficial ownership framework with FATF standards. - Tax policy and revenue administration: - In August, each revenue department developed an implementation plan to launch anti-corruption measures (SB). - The new government will refrain from new exemptions or incentives and approving new projects under the SDP Act; will submit amendments to the SDP Act introducing transparent, rules-based eligibility criteria for time-bound incentives by end-August (reset SB) and similar amendments under Port City Act (MEFP ¶35). - Strengthen coverage of exemptions in semi-annual publication to include incentives under the Port City Act (revised SB). - PFM measures: - Enact a Public Procurement law and implement procurement system reforms including increasing competitive procurement and rolling-out an e-procurement system. - Strengthen regulatory framework to oversee and manage public assets. - Ensure regular and timely publication of audited financial statements of the 52 major SOEs (MEFP ¶19). ### Structural reforms and raising potential growth - Structural reform agenda targets trade liberalization, labor market, SOE governance and productivity, and climate resilience. - Trade: regulations adopted to rationalize para-tariffs; implementation of a National Export Strategy and expedited FTAs and regional trade bloc entry. - Labor market: work to unify and modernize labor laws into a unified Employment Law; Women’s Empowerment Act enacted in July 2024. - SOEs: government advancing structural reforms to improve financial viability in electricity and airline sectors and strengthen governance through regular audited financial statements (MEFP ¶19). - Climate: aim to enhance electricity generation from renewable sources and engage multilateral partners on capacity development for climate mitigation and adaption. ### Program modalities, financing, and risks - Proposed modification of the primary balance, tax revenue, and social spending ITs for March 2025, and new QPCs and ITs until December 2025; PAs ensure implementation of measures critical for the program, including passage of revenue legislation and presentation of the draft 2025 budget for second reading. - Program financing: - Program financing gaps in 2024-27 expected to be filled through debt restructuring (¶18) and new financing. - Sri Lanka’s program is fully financed, with firm commitments of financing from IFIs for the next twelve months and good prospects for adequate financing for the rest of the program period. - The People’s Bank of China (PBoC) renewed its swap arrangement with CBSL for another three years up to December 2027. - External financing table (selected lines, in millions of US dollars): Total 2022-27 Financing Gap (A) = -25,661; Program Financing (B) total = 25,661. - IMF EFF = 3,037 (component of program financing shown in table). - IFI program financing support entries include World Bank and ADB figures in table; gross international reserves memorandum: 1,898 (2022), 4,392 (2023), 6,122 (2024), 7,056 (2025), 9,303 (2026), 13,118 (Total 2022-27). - Capacity to repay the Fund: - Under the program, Fund credit outstanding would peak at 3.4 percent of GDP in 2027, or 13.8 percent of exports of goods and services, and 23.8 percent of gross reserves. - EFF repurchases and charges would peak in 2031, at 2.2 percent of goods and services exports, and 3.8 percent of gross reserves. - Safeguards Assessment: - CBSL equity has returned to positive levels and is expected to continue recovering gradually thanks to earnings on holdings of government bonds. - CBSL will continue to monitor its financial position and is working on implementing remaining recommendations from the February 2023 updated safeguards assessment. - Article VIII compliance: Since program approval, Sri Lanka has not (i) introduced additional measures giving rise to new MCPs or exchange restrictions, (ii) modified/intensified existing exchange restrictions and MCPs subject to Fund Approval under Article VIII, (iii) concluded bilateral payment agreements inconsistent with Article VIII, or (iv) imposed or intensified import restrictions for BOP purposes. ### Staff appraisal and policy recommendations - Program performance remains strong; economy recovering with contained inflation, reserve accumulation, improved fiscal performance, and progress in restoring debt sustainability. - All end-June and end-December quantitative targets were met except for the IT on social spending; all end-December continuous SBs and most other SBs were either met or implemented with a delay. The review includes three PAs. - Key policy recommendations and priorities: - Maintain macroeconomic stability and restore debt sustainability via persevering with responsible fiscal policy and sustained revenue-based consolidation. - Reinvigorate tax compliance and timely implementation of revenue measures. - Reinstating cost-recovery electricity prices without delay to curb fiscal risks from SOEs; remedial action should be taken following recent breach of continuous SB on cost-recovery electricity pricing. - Prioritize spending under the new fiscal rules framework and smooth execution of capital spending throughout the year in line with approved budget allocations. - Closely monitor spending related to the interest subsidy scheme to avoid negative spillovers to banks and ensure fiscal path remains on track. - Continue to reinforce monetary, exchange rate, and financial sector policies, maintain price stability, refrain from monetary financing, phase out BOP restrictions gradually, and allow continued exchange rate flexibility to rebuild external buffers. - Create favorable conditions for private sector credit and FDI to expand. - Risks to program implementation: - Financial risks from authorities’ capacity to repay pose credit risks to the Fund. - Business and reputational risks if the new government’s reform agenda deviates significantly from program objectives. - With progress achieved, risks from a protracted debt restructuring process have declined significantly. - Key mitigation measures: authorities’ commitment to upfront implementation of reform measures, adjusting program conditionality to evolving circumstances, and steadfast implementation of structural reforms, supported by extensive Capacity Development (Annex VI). *Source: IMF staff report content as provided.* ### 38. Although improving, structural challenges need to be addressed to unlock Sri Lanka’s ### 1lkaea2025001-print-pdf - 38. Although improving, structural challenges need to be addressed to unlock Sri Lanka’s ### Overview - Although improving, structural challenges need to be addressed to unlock Sri Lanka’s long-term potential. Despite ongoing efforts, comprehensive yet strategic reform plans are needed to achieve higher and more-inclusive sustained growth. ### Progress - Considerable progress to address corruption vulnerabilities has been made and the new government’s mandate to reduce and eliminate acts of corruption would support revenue-based fiscal consolidation and economic recovery. ### Priorities for reform - Prioritization should be given to further liberalize trade, improve the investment climate, reduce the gender gap, improve SOE efficiency, and mitigate climate vulnerabilities. *https://www.imf.org/-/media/files/publications/cr/2025/english/1lkaea2025001-print-pdf.pdf* ### 39. Based on Sri Lanka’s overall performance and commitments under the program ### 1lkaea2025001-print-pdf - 39. Based on Sri Lanka’s overall performance and commitments under the program ### Program status and staff recommendation - Staff supports the completion of the Third Review. - Staff supports the requests to the Board for: - modification of quantitative conditionality, - completion of the MPCC consultation (MEFP), - completion of the financing assurances review. ### Real sector: 2024 recovery and near-term outlook - The economy showed a strong recovery in 2024, driven by expansions across all sectors, supported by strong capital investment and robust consumption recovery. - High-frequency indicators suggest a positive outlook. - Trade: exports growth and imports recovery are evident, although the trade deficit remains substantial. - Inflation: inflation dropped sharply, shifting to deflation in recent months, mainly due to the decline in energy prices and real exchange rate appreciation. ### Fiscal sector: consolidation and debt dynamics - Fiscal policy tightened despite the elections, resulting in lower gross financing needs though public debt remains high. - Tax collections were driven by VAT reforms and higher fuel excises. - Interest payments have started declining. - Domestic government bond yields declined to pre-crisis levels. - Sovereign spreads: Sri Lanka’s Emerging Markets Bond Index (EMBI) spreads dropped following the successful completion of international bond exchange. ### Financial markets and monetary policy - CBSL lowered the policy rate through successive rate cuts in 2024. - T-bill rates moved toward the policy rate with compression of the sovereign risk premium; the yield curve has become upward sloping again. - Market liquidity increased and CBSL offloaded government security holdings. - The spread between lending and deposit rates returned to its longer-term average. - Equity market experienced growth in 2024. ### Foreign exchange, remittances, tourism, and reserves - The rupee appreciated by over 10 percent in 2024, supported by a tight monetary stance and an improved balance of payments outlook. - REER has appreciated substantially. - Foreign holdings of government securities have been shrinking as the interest rate differential narrowed. - The underlying current account balance remained strong for the second consecutive year, buoyed by a strong recovery in remittances and tourism inflows. - Gross and net reserves rose further. ### Monetary and financial sector health - Money growth remains contained with the offloading of T-bills roughly offsetting FX reserve accumulation. - Credit to the private sector started to pick up, supporting the economic recovery. - Reported capital levels remain high after accounting for the full impact of debt restructuring. - Nonperforming loans remained high, and provisions increased in 2024. - Banking sector profits have been gradually improving; banking sector liquidity remains abundant given still-lagging credit to the private sector. ### Balance of payments and external financing - Goods exports picked up in 2024; imports picked up more slowly, leading to a positive current account balance. - Investment flows have dried up apart from FDI and portfolio debt flows. - Gross International Reserves have been on a rising trend. - The improved current account balance in 2023 was supported by increased net savings by the private sector and fiscal consolidation by the public sector. ### Selected headline indicators (as reported) - Rupee appreciation: "The rupee has appreciated by over 10 percent in 2024." - Gross international reserves (selected end‑period values reported in tables/figures): "1,898", "4,392", "5,605", "6,122", "7,174", "7,056", "9,262", "9,303", "13,466", "13,118", "14,710", "14,875", "15,175" (in millions of U.S. dollars, as presented in the source tables/figures). - Net international reserves (selected values reported): "-3,196", "-1,085", "1,574", "2,606", "5,007", "8,670", "10,475", "10,904", "11,570" (in millions of U.S. dollars, as presented). - Banking sector gross nonperforming loans to total gross loans (reported Q2 2024): "12.6" (percent). - Broad money (selected end‑period values reported): "12,296", "13,189", "14,511", "15,916", "17,302", "18,775", "20,366", "22,078", "23,917" (in billions of rupees, as presented). - Staff support for program review and related Board actions: "Staff supports the completion of the Third Review" and supports requests to the Board for "modification of quantitative conditionality, and completion of the MPCC consultation (MEFP), and of the financing assurances review." *Source: IMF staff report content as provided in the supplied PDF content unit.* ### Annex I. Sri Lanka’s Debt Restructuring Process ### Annex I. Sri Lanka’s Debt Restructuring Process ### Official sector involvement (OSI) - OSI includes negotiations with (i) the Official Creditor Committee (OCC), (ii) China EXIM Bank, and (iii) smaller exposures to other official creditors. - External Official Restructuring Perimeter Claims – End 2023 Stock (USD billions): - Official Creditor Committee: 5.9 - China Exim Bank: 4.2 - Others: 0.5 - Total: 10.6 - Key events and status: - OCC: France, India, and Japan (co-chairs) announced formation of the OCC in 2023. An AIP between Sri Lanka and the OCC consistent with program parameters was reached in November 2023. In June 2024, agreement on codifying the arrangement as a Memorandum of Understanding was reached; bilateral agreements with individual OCC creditors are being finalized. - China EXIM Bank: Did not formally join the OCC but participated as observer. An AIP in line with program parameters was reached in October 2023. In June 2024 Sri Lanka finalized amendment agreements with China EXIM, and started debt service on restructured facilities in July 2024. - Remaining bilaterals: Sri Lanka remains in arrears to Saudi Arabia, Kuwait, Iran, and Pakistan until restructuring agreements are reached. Fund policy treatment of these arrears evolves from the second to third review under the LIOA policy (Strand 4) as described in the source text. ### Private Sector Involvement (PSI) - PSI includes International Sovereign Bonds (ISBs), China Development Bank (CDB), and other commercial creditors. - External Commercial Restructuring Perimeter Claims – End 2023 Stock (USD billions): - International Sovereign Bonds: 14.2 - China Development Bank: 3.3 - Others: 0.2 - Total: 17.8 - International Sovereign Bonds (ISBs): - Authorities organized an Investor Presentation immediately after EFF approval and received a first restructuring proposal on April 11, 2023. - Negotiation timeline: - Initial discussions through 2023; restricted round in April 2024; second restricted round produced a Joint Working Framework (JWF) in early July 2024 incorporating macro-linked bonds (MLBs). - IMF staff and the OCC assessed the JWF as not meeting DSA and comparability standards. - Third restricted period began September 12, 2024; Agreement in Principle (AIP) on September 18, 2024 was assessed by IMF staff as consistent with program DSA and by the OCC as meeting comparability principles. - Features of the bondholder agreement: - Principal haircut and step-up coupon in ISB treatment per the September 18 AIP (amended JWF). - Inclusion of state contingent debt instruments (SCDI) in the form of macro-linked bonds (MLBs) where coupon and principal increase if dollar GDP and economic growth exceed certain levels by 2027. - A governance-linked bond: more coupon relief provided for one restructured bond if Sri Lanka met two fiscal governance criteria (revenue to GDP by 2027 and publishing fiscal strategy statements). - Local ISB holders (12 percent of ISBs) reached AIPs on September 18 with a non-contingent treatment in local currency—this did not include SCDI. - Bond exchange outcomes: - Authorities launched the bond debt exchange on November 25, 2024, with a consent solicitation deadline of December 12, 2024. - 98 percent of ISBs were exchanged through the bond exchange after enforcement of collective action mechanisms. - By the deadline, 96 percent of investors had initially accepted to enter the bond exchange. - Portfolio composition: seven bonds with aggregate CAC features and four without. - Participation in ten of eleven bonds increased from 98 percent to 100 percent after enforcement of collective action mechanisms; one bond (holdout Hamilton Reserve Bank (HRB)) had 73 percent participation. - HRB did not participate in the December 2024 exchange and initiated US litigation; the US court denied Sri Lanka’s motion to dismiss and granted multiple stays through November 30, 2024; Sri Lanka filed a motion to extend the stay. - Credit index outcome: JP Morgan announced MLB instruments satisfied index eligibility and would be included in emerging market bond indices. - Yields: spreads for the non-macro-linked bond (2035 maturity with governance-linked features) at around 520 bps. Note in the source: coupon rates could be reduced by 75 basis points if governance conditions are met. - China Development Bank (CDB): - Technical exchanges in May and October 2023. An AIP with CDB was reached in November 2024, assessed by IMF staff as consistent with debt sustainability. Authorities completed debt treatment with CDB and started paying on restructured debt in December 2024. - Other commercial creditors: - AIP with HSBC in October 2024 on a Sinosure-backed facility. Commercial debt yet to be restructured stands at less than USD 50 million. ### Domestic Debt Operation (DDO) - DDO mostly concluded in 2023 and included: - Maturity extension of T-bonds held by superannuation funds. - Exchange of dollar-denominated SLDBs held by domestic banks and other small FX-denominated bank loans into local currency bonds with longer maturities. - Exchange of T-bills held by CBSL into long-term T-bonds. - Outcomes and related measures: - The operation helped manage financing needs during the program period and lowered gross financing needs to meet the 2027-32 program debt targets. - Late-2024 agreements with two state banks on restructuring large FX loans from CPC: dollar instruments renegotiated into long-term loans with a lumpsum payment to compensate day-one losses and help restore banks’ capital under the holistic bank recapitalization plan. - Banking sector absorption of government debt: around 39 percent of banking system assets as of end-2023, expected to rise to around 42 percent by end-2024. - Authorities agreed with state-owned banks on treatment in line with second review assumptions; recapitalization originally planned through a long-term bond is being executed through provision of cash, which lowers the debt stock in 2024 but does not materially affect gross financing needs. ### Debt Sustainability and SRDSA updates - DSA macro-financing and projection updates: - Macroeconomic updates since June 2024 include (i) higher growth and primary balance, and lower inflation in 2024, (ii) smaller interest bill for 2024, and (ii) lower depreciation by end 2024. - Medium-term projections remain anchored at Sri Lanka’s medium-term growth potential, the central bank's inflation target, and the External Balance Assessment (EBA)-based misalignment and external adjustment needs. - Key macro/nominal projection comparisons (2nd Review vs Current) from the source table: - Real growth (%) — 2023–2029 (selected rows): - 2nd Review: 2.3, 2.0, 2.7, 3.0, 3.1, 3.1, 3.1 - Current: 2.3, 4.5, 3.0, 3.0, 3.1, 3.1, 3.1 - GDP deflator inflation (yoy, %) — 2023–2029 (selected rows): - 2nd Review: 17.5, 9.8, 6.9, 5.4, 5.2, 5.1, 5.0 - Current: 17.5, 3.5, 4.9, 5.5, 5.3, 5.2, 5.1 - Primary balance (% of GDP) — 2023–2029: - 2nd Review: 0.6, 1.0, 2.3, 2.3, 2.3, 2.3, 2.3 - Current: 0.6, 2.2, 2.3, 2.3, 2.3, 2.3, 2.3 - Nominal GDP (Rs bln) — 2023–2029 (selected values): - 2nd Review: 27,630; 30,917; 33,958; 36,839; 39,959; 43,287; 46,869 - Current: 27,630; 29,893; 32,309; 35,123; 38,113; 41,343; 44,819 - Financing market and issuance assumptions: - Domestic T-bill rates declined in 2024 from 14 percent in January to 9 percent in December. - Authorities issued around one third of their T-bond issuances as long-term domestic debt (above 5-year maturity) in 2024, at rates between 12 and 13 percent. - The outlook on long-term issuances remains challenging; 2025 projections assume a smaller share of long-term bonds relative to the second review. - Note from the source: T-bond rates fell from around 14 percent in January to around 11 percent by December 2024. - Restructuring coverage and effects: - Authorities have completed agreements in principle on around 97 percent of the restructuring debt perimeter as defined under their strategy. - Proposed external creditor treatments produce significant reduction in debt service for the next decade and imply meaningful NPV reduction: - 41 percent NPV/NPV relief for total restructured external debt (at 9 percent discount rate corresponding approximately to the bond restructuring exit yields) in the baseline case of the MLBs. - 37 percent NPV/NPV relief in the highest growth state under the MLB. - All four program debt targets are respected in the baseline under the authorities’ restructuring agreement scenario. - 2027-32 average Gross Financing Needs (GFNs): 12.73% - The total relief in the baseline provides buffers to compensate for extra risks from macro-linked bonds and ensure debt sustainability. ### State Contingent Instruments (SCDI) and SRDSA methodology - Inclusion of SCDIs (MLBs) led staff to assess debt sustainability with both a baseline and additional assessment for contingent risks. Improvements in growth increased the probability that SCDI payments could be triggered relative to the second review. - Staff developed a methodology to assess risks from SCDIs that: - Checks if adding SCDIs increases the likelihood of exceeding debt sustainability targets. - Verifies whether SCDI triggers are linked to real improvements in debt carrying capacity (so increased payments only occur when capacity improves). - Assesses the risk of extra payments in downside scenarios where debt targets are already exceeded without SCDIs. - Analyzes tail risks by checking SCDI maximum payment ceilings, their size and effects, and separately assessing largest possible SCDI contributions in high-debt scenarios. - Implementation: - The methodology uses the SRDSF’s debt fan chart module to compute a distribution of debt and GFN outcomes around the baseline and compares scenarios with and without SCDIs. - The comparison evaluates: (i) whether SCDIs increase the chance of exceeding debt targets, (ii) whether positive SCDI contributions are compensated by baseline buffers, and (iii) whether extreme/high risks from SCDIs are acceptable. *Source: Annex I. Sri Lanka’s Debt Restructuring Process (excerpt).* ### 8. Using this methodology staff assessed the September 18’s AIP to be in line with the ### 8. Using this methodology staff assessed the September 18’s AIP to be in line with the debt sustainability targets ### Debt sustainability assessment and SCDI implications - Staff assessed the September 18’s AIP to be in line with the debt sustainability targets. - The chances of breaching debt and financing needs targets were below acceptable thresholds. - In scenarios where targets were already exceeded, SCDI contributions were smaller than the baseline buffers with a large probability. - The SCDIs feature a cap on payments, and the contribution from SCDI in extreme scenarios was also limited. ### Debt coverage, disclosures, and perimeter (DSA) - DSA perimeter includes: - (i) central government debt; - (ii) SOE debt guaranteed by the central government; and - (iii) liabilities of the central bank arising from the 2016-20 EFF and bilateral swap arrangements. - Note: Oth. pub. fin. corp. holdings of CG debt includes holdings by state-owned banks, but excludes retirement funds. Provincial and local governments do not carry debt as they are not authorized to borrow. - Debt coverage entries shown: - Budgetary central government: Yes - Extra budgetary funds (EBFs): No - Social security funds (SSFs): No - State governments: No - Local governments: No - Public nonfinancial corporations: Yes - Central bank: Yes - Other public financial corporations: Yes - Reporting on intra-government debt holdings: table entries include numeric holdings (as provided in source): - Budget. central govt: 274236876429 - Nonfin. pub. corp.: 702702 - Total (reported line): 000000274243897131 ### Public debt structure indicators and dynamics - Commentary on 2022–2023 dynamics: - Accelerating inflation reduced the real value of domestic debt in 2022. - Exchange rate depreciation led to a large increase in external and foreign-currency debt. - These dynamics reversed partially in 2023 as the exchange rate appreciated and inflation slowed down. - Legal composition: - Foreign-law and multilateral law debt account for close to half of Sri Lanka's debt. - Assumption for debt operation: - The debt operation is assumed to rebalance the maturity profile, increasing the residual maturity. - Residual maturity reported: - Residual maturity: 6. years ### Baseline, realism, and medium- to long-term risk analysis - Baseline scenario and realism of assumptions are presented (Figures referenced). - Medium-Term Risk Analysis and Long Term Amortization Module findings: - Overall, the triggers for the amortization module are not met. - If Sri Lanka's public finances (primary balance and macroeconomic policies) revert to historical averages, long term financing risks remain high (as shown by the historical average assumptions). - The authorities’ reform efforts, supported by the extended arrangement, ameliorate these risks. - Overall Risk Indication for modules and projections: - ProjectionVariable Risk Indication entries include numeric indicators of 0.00 and 1.00 in the source figures. ### Annex III — Revisions to Personal Income Tax (PIT) - May 2022 reform (effective January 1, 2023) outcomes: - Raised marginal PIT rate schedule, reduced PIT tax-free allowance, and introduced mandatory withholding. - Resulted in increasing PIT revenue by about 0.5 percent of GDP in 2023 compared to 2022. - Additional measures (reinstating interest income taxation and removing corporate income tax exemptions) raised revenue by 0.5 and 0.1 percent of GDP respectively, bringing total income taxes increase in 2023 to 1.1 percent of GDP. - Inflation and bracket creep: - Cumulative CPI inflation from reform design until end-December 2024 amounted to over 40 percent, producing bracket creep. - December 2024 cabinet amendments (effective April 2025): - Tax-free threshold increased from Rs 1.2 mln to Rs 1.8 mln per year. - Width of the 6 percent marginal tax rate band increased from Rs 500,000 to Rs 1,000,000 per year. - 12 percent marginal tax rate eliminated. - Highest marginal tax rate of 36 percent will be reached at annual income of Rs 4.3 mln, instead of Rs 3.7 mln. - Distributional and revenue impacts: - The amendments result in the reduction of average tax rates for most income levels. - Individuals with annual income between Rs 1.2 and 1.8 million see the highest percentage reduction in tax payments. - Individuals earning between Rs 1.8 million and 4 million per year will see a reduction in their tax bill by at least 40 percent. - Staff estimates the revenue loss from the amendments at just under 0.2 percent of GDP in annual terms. - With the amendments going into effect on April 1, the revenue loss in 2025 would be limited to three quarters of that amount. - Progressivity and redistributive effects: - Estimates suggest only the top 17 percent of individuals will be subject to PIT under the new regime (extrapolating income distribution data from 2019). - The measure of PIT progressive capacity increases from 41.3 to 43.6. - The redistributive capacity falls from 4.32 to 3.54 due to lower average tax rates. - Sri Lanka’s PIT remains comparable in both progressivity and redistributive capacity to regional peers. ### Annex IV — Status of Governance Reforms - Anti-corruption legal framework and institutions: - Key steps completed to operationalize CIABOC: (i) 200 senior officials published asset declarations in line with Anti-corruption Act in July (SB); (ii) new Director General appointed on January 10; (iii) a new strategic plan under review to be published by mid-March and corresponding budget incorporated into the 2025 Budget. - Next steps for CIABOC by June-2025 (new SB): operationalize an e-asset declaration system with public access, publish remaining declarations and list of non-filers, revise form to include beneficial ownership, and modify redaction rules to disclose values of bank accounts and other assets. - Asset Recovery Law: draft amendment to harmonize with UNCAC to be gazetted in February after public consultation; law on track to be enacted by end-April 2025 (reset SB). - Tax policy and incentives: - Government will refrain from approving new projects under the SDP Act and from providing new exemptions or incentives. - Amendments to SDP Act to introduce transparent, rules-based eligibility criteria for time-bound incentives to be submitted by end-July 2025 (reset SB). Similar amendments for Port City Act incentives will be introduced (MEFP ¶35). - Revenue administration: - Revenue departments to begin regularly reporting quarterly implementation progress on anti-corruption measures (implementation plans developed in August (SB)). - Reforms to enhance customs’ governance will begin based on recent IMF TA recommendations (MEFP ¶36). - Public Financial Management (PFM) and procurement: - Commitment to semi-annual publication of procurement contracts, list of firms receiving tax exemption, and associated tax expenditure estimates under the SDP Act. - Beginning June 2025, reporting coverage will include exemptions under the Port City (revised SB) and the tax expenditure report will be improved based on IMF TA recommendations. - Procurement next steps: - (i) enact a Public Procurement Law reflecting international good practice by end-June 2025; - (ii) strengthen the e-procurement system; and - (iii) reduce the share of non-competitive procurement (MEFP ¶37). - Pilot on a competitive tender under the e-procurement system will begin in March 2025. - SOE governance: continue implementing SOE policy; need to ensure regular and timely publication of audited financial statements of the 52 major SOEs (MEFP ¶19). - Financial sector oversight: - CBSL began implementing amendments to the Banking Act in June 2024 (SB) to enhance corporate governance and supervision. - CBSL issued Directions to banks and will monitor compliance. - Government issued framework in May to strengthen governance of public banks (SB) and will monitor implementation. - Public asset oversight and management: - Authorities will (i) submit to Cabinet proposed criteria for allocating rights to public assets with transparency and competition requirements and a timeline to bring laws in compliance with policy, and (ii) amend the National Audit Act to facilitate effective levying of fines on officials who fail responsibilities by June 2025 (MEFP ¶39). - AML/CFT: - Actions under the AML/CFT National Policy for 2023-2028: - (i) enact amendments to the Companies Act to make beneficial ownership framework consistent with FATF standards by end-April 2025; - (ii) conduct risk-based supervision; - (iii) strengthen use of financial intelligence to identify potential corruption activities; - (iv) strengthen cooperation between Financial Intelligence Unit, law enforcement, and CIABOC to facilitate parallel investigations (MEFP ¶40). ### Annex V — Capacity Development (IMF Missions, January 2021 – January 2025) - Tax Policy TA/Training (selected entries): - Tax Policy Reform — FAD — Jun 6-17, 2022 - VAT and Excise Tax — FAD/LEG — Jan 12-25, 2023 - Property and Wealth Tax — FAD — Jun 30 - Jul 13, 2023 - Property Taxation in Sri Lanka — FAD — Feb 7-21, 2024 - Tax Expenditure Quantification and Reporting — FAD — Jul 11-22, 2024 - Revenue Administration TA/Training (selected entries): - Strengthening the Large Taxpayer Office — FAD/SARTTAC/STX/LTX — Feb 15 - Mar 8, 2022 - Implement Large Taxpayer Office — FAD/STX — Apr 4-18, 2022 - Tax Administration Diagnostic Tool (TADAT) training — FAD — Dec 5-9, 2022 - TADAT Assessment — SARTTAC (with ADB and WB) — Jan 9-26, 2023 - RAMIS — SARTTAC — Mar 7 -20, 2023 - Guiding the Development of Tax Administration Reform — FAD (with WB) — Jul 3-11, 2023 - Medium-term Revenue Administration Reform Plan — FAD — Aug 21-Sep 3, 2023 - Compliance for High-Wealth Individuals (Peripatetic) — FAD/STX — Sep 5-Dec 5, 2023 - Strengthened Revenue Administration Management and Governance Arrangements — FAD/SARTTAC — Oct 24-26, 2023 - Guiding the Development of a Revenue Authority — FAD (duty station based) — Nov 6, 2023-Jan 19, 2024 - Diagnostic Assessment on the Customs and Excise Departments — FAD/SARTTAC — Feb 26 - Mar 7, 2024 - Implementation of VAT Refund Model — FAD — Feb 28-Mar 7, 2024 - Compliance for High-Wealth Individuals — FAD — Jan 29-Feb 2; Jul 1-Sep 13, 2024 *Source: IMF staff assessment and annexes as provided in the content unit.* ### 3.0 FAD/LTX/STX (with WB) Apr 23-30, 2024 ### 3.0 FAD/LTX/STX (with WB) Apr 23-30, 2024 ### IMF Capacity Development Missions (January 2021 – January 2025) - Revenue Administration and Taxation missions (selected entries): - "3.0 FAD/LTX/STX (with WB) Apr 23-30, 2024" - Revenue Administration FAD/STX Jul 3-12, 2024 - Tax Incentive Reform and Improving Tax Expenditure Reporting FAD/STX Jul 11-22, 2024 - Compliance Management of High-Wealth Individuals and Criminal Investigations Program Progress Report (Peripatetic) FAD Jul 15-Oct 11, 2024 - Support for the Development of an Information Technology Strategic Plan (ITSP) FAD Aug 8-Sep 9, 2024 - Customs Tax Cooperation and Customs Modernization FAD Aug 14-17, 2024 - Status of Key Tax Reform Measures - Transition of Resident Tax Advisors FAD/STX Aug 26-Sep 17, 2024 - Implementing Anti-Corruption Measures at the Sri Lanka Customs Department FAD/STX Oct 21-29, 2024 - Compliance Management of High-Wealth Individuals and Criminal Investigations Program (Peripatetic) FAD Nov 11-Dec 31, 2024 - SVAT Repeal and VAT Refund FAD/STX Nov 27-Dec 10, 2024 - Revenue Administration FAD Dec 3-6, 2024 - High-Wealth Individual and Tax Crime Investigations FAD Jan 2-10, 2025 - Public Financial Management missions (selected entries): - Strengthening Macro-Fiscal Unit: Fiscal Analysis and Forecasting SARTTAC Mar 15-26, 2021 - Strengthening the Macro-Fiscal Unit FAD/SARTTAC/STX/LTX Jan 20-Feb 9, 2022 - Macro-Fiscal Unit and MTFF FAD/SARTTAC/LTX Sep 19-23, 2022 - Fiscal Risks Management FAD/SARTTAC/LTX Oct 3-7, 2022 - PFM Diagnostic Scoping Mission/ PFM Reform Agenda FAD/SARTTAC/STX/LTX Dec 8-10, 2022 - Debt Management Reform Plan MCM/LEG (with WB) Feb 20-Mar 3, 2023 - PFM Law (including fiscal rules) FAD/LEG Mar 13-24, 2023 - Developing a Fiscal Strategy Statement FAD Jun 12-16, 2023 - Debt Management Law LEG/MCM/WB Jun 26-Jul 7, 2023 - Drafting the PFM Bill: Strengthening the PFM Legal Framework FAD/LEG Aug 10-21, 2023 - Develop Rules/Regulations for the Provision of Sovereign Guarantees and On-lending FAD/SARTTAC/WB Oct 10-16, 2023 - Debt Management Reform Plan Implementation MCM/FAD/STX/WB Oct 16-25, 2023 - Strengthening Cash Management Practice FAD Feb 13-23, 2024 - Improving Fiscal Reporting SARTTAC Apr 2024 - Review of Chart of Accounts FAD/SARTTAC Apr 15-18, 2024 - Strengthening Accounting and Financial Reporting FAD/SARTTAC May 2-16, 2024 - Review of Fiscal Strategy Statement FAD/STX May 14-Jun 28, 2024 - Implementing a Medium-Term Budget Framework FAD Jun 3-14, 2024 - Scoping Mission to Establish a Public Debt Management Office MCM Aug 29-30, 2024 - Reviewing ITMIS Implementation for Supporting Enhanced Budget Execution and Commitment Controls FAD/SARTTAC Sep 3-16, 2024 - Revising Financial Regulations FAD/LTX Nov 20-29, 2024 - Fiscal Risk Statement FAD/STX (with WB) Jan 15-18, 2025 - Enhancing the Primary Debt Market and Support to the Establishment of the Public Debt Management Office FAD/SARTTAC/LTX (with WB) Jan 20-29, 2025 - Monetary, Financial, Statistics, Governance, and Regional training missions are listed across 2021–2025, covering: - Monetary Policy Operations, Monetary Policy Frameworks, Forecasting and Policy Analysis System, FX Market Development, Liquidity Monitoring. - Central Bank Operations, Financial Stability, Debt Management, Macroprudential policy, Supervision, Debt Management support (including with WB). - Governance Diagnostic Missions and strategic planning support for CIABOC. - Government Finance Statistics expansion, National Accounts rebasing and updates, PPI and CPI updates, Institutional Sector Accounts. - Monetary and Financial Statistics (STA Feb 20-Mar 8, 2024). - Regional training on numerous topics including Macroeconometric Forecasting and Analysis, Fiscal Policy Analysis, Collections and Arrears Management, High-Frequency Indicators, Nowcasting, Climate-related macroeconomics, among many others, with specific date listings through Jan 2025. ### Risk Assessment Matrix — Key Risks, Likelihoods, Expected Impacts, and Policy Responses - Domestic Risks: - Program financing risks arising from lower reserve accumulation, financing shortfalls from external partners, high interest burden, and lower tax revenue collection - Likelihood: High - Expected Impact: H: Program becomes underfinanced - Policy Response: Depending on triggers, a combination of actions including (i) higher IFI financing (ii) deeper debt restructuring, (iii) broader and more frontloaded revenue mobilization measures could be considered. - Waning reform momentum especially on revenue mobilization measures - Likelihood: High - Expected Impact: H: Can result in fiscal slippages and weaken confidence and delay access to external financing, slowing economic stabilization. - Policy Response: Enforce program slippages through corrective actions. Streamline and prioritize reforms in line with the program objectives. Continue to engage frequently on program performance through weekly meetings with the authorities. - Social unrest, fueled by falling real incomes including from tax hikes and cost recovery pricing in the energy sector, insufficient anti-corruption efforts, and unmet election promises - Likelihood: Medium - Expected Impact: M: Can delay or reverse progress of important reforms - Policy Response: Proactively implement inclusive reforms including social security and anti-corruption reforms. Strengthen communication to increase public understanding of the program design and objectives. - Upside inflation risks from stronger economic rebound and second round effects from new tax measures, or exchange rate depreciation pressure - Likelihood: Medium - Expected Impact: M: can de-anchor inflation expectations and reduce real income - Policy Response: Monitor inflation development closely and tighten monetary policy if needed to keep inflation anchored around the target level. - External Risks: - Intensification of regional conflicts (e.g., Gaza and Israel, Russia’s war in Ukraine, and/or other regional conflicts or terrorism) - Likelihood: High - Expected Impact: H: Disrupts trade, remittances, and capital inflows, worsening balance of payments. Can slow recovery. - Policy Response: Support the economy with easing monetary policy and targeted fiscal support. Address the BOP pressure by allowing the exchange rate to adjust and seeking higher access to external financing support. - Commodity price volatility (supply disruptions, export restrictions, OPEC+ decisions) - Likelihood: High - Expected Impact: H: Increase volatility in inflation dynamics and uncertainties in economic activity - Policy Response: Closely monitor implications to inflation and maintain agility of monetary policies. - Deepening geoeconomic fragmentation (inward-oriented policies, weakened international cooperation) - Likelihood: High - Expected Impact: M: Slow growth in trade and FDI, increase input costs and inflationary pressure. - Policy Response: Develop corresponding export and FDI promotion strategies, promote domestic suppliers and improve labor skills. Closely monitor implications to inflation and maintain agility of monetary policies. - Global growth surprises (Slowdown) in major economies - Likelihood: Medium - Expected Impact: M: Slow trade and capital inflows, with negative spillovers to growth. - Policy Response: Support the economy with easing monetary policy and targeted fiscal support. Address the BOP pressure by allowing the exchange rate to adjust and seeking higher access to external financing support. - Note on RAM methodology: - The relative likelihood terminology: "low" = probability below 10 percent, "medium" = probability between 10 and 30 percent, "high" = probability between 30 and 50 percent. - The RAM reflects staff views as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. ### Appendix I. Letter of Intent — Key Points and Program Status (February 11, 2025) - Program framework and recent developments: - The program is under a 48-month Extended Fund Facility (EFF) arrangement. - Recent outcomes cited: - "Growth is expected to have reached 4.5 percent last year." - "A significant reserves build-up continues, and inflation has remained low." - "Our ambitious multi-year revenue-based fiscal adjustments have been on track." - "Tax revenues have improved significantly." - "We successfully completed the international bond exchange in December." - Completed restructuring agreements with China EXIM Bank and China Development Bank; finalizing bilateral agreements with members of the Official Creditor Committee (OCC). - Commitments on continuing negotiations with remaining official creditors and external private creditors. - Program implementation and conditionality: - Prior actions completed: relaxing import restrictions; on track to complete prior actions on the 2025 draft budget and underlying revenue measures. - For end-June 2024: - "All quantitative performance criteria (QPCs) and indicative targets (ITs) were met, except the IT on social spending." - For end-December 2024: - "All end-December QPCs were also met, while the IT on social spending was missed." - Structural benchmarks due by end-January 2025: - "Most structural benchmarks due by end-January 2025 were met or implemented with delay. Those missed were in multiple cases due to the electoral cycle." - Inflation outcomes: - "End-June and end-December headline inflation fell below the monetary policy consultation clause (MPCC) outer lower band primarily due to administrative price adjustments and real exchange rate rebound in 2024." - Ongoing objectives under the EFF: - (i) an ambitious revenue-based fiscal consolidation, accompanied by strong social safety nets, fiscal institutional reforms, and cost-recovery based energy pricing; - (ii) restoration of public debt sustainability; - (iii) restoring price stability and rebuilding reserves under greater exchange rate flexibility; - (iv) safeguarding financial sector stability; - (v) structural reforms to address corruption vulnerabilities and enhance growth. - Requests and monitoring: - The authorities request: - (i) approval of the modification of ITs on primary balance, tax revenue, net international reserves, and social spending for end-March 2025 and the new proposed quantitative targets for June-December 2025, - (ii) approval of the reformulation or resetting of existing SBs and the setting of new SBs, - (iii) completion of the Board consultation triggered by the end-June and end-December 2024 MPCC breaches, - (iv) completion of the financing assurances review. - Program monitoring to continue through semi-annual reviews, QPCs, ITs, and structural benchmarks as described in the attached MEFP and Technical Memorandum of Understanding. - Financing request: - The authorities request the IMF Executive Board approve the completion of the third review under the EFF and the disbursement of "SDR 254 million (43.9 percent of quota)" upon approval. - Transparency: - "Consistent with our commitment to transparency policy, we consent to the IMF’s publication of this letter and its attachments, as well as the associated staff report." *Source: IMF Staff* ### 1. We remain fully committed to the economic reform program supported by the ### 1. We remain fully committed to the economic reform program supported by the ### Program commitment and objectives - The IMF Executive Board approved the second review of Sri Lanka’s four-year Extended Fund Facility (EFF) program on June 12, 2024. - Program priorities: restoring macroeconomic stability and debt sustainability; mitigating economic impact on the poor and vulnerable; safeguarding financial sector stability; strengthening governance; and enhancing medium-term growth potential. - Core pillars of the comprehensive economic reform program: - (i) an ambitious primarily revenue-based fiscal consolidation, fiscal institutional reforms, and cost-recovery energy pricing; - (ii) a stronger social safety net; - (iii) a sovereign debt restructuring strategy; - (iv) strengthened central bank independence with exchange rate flexibility; - (v) policies to safeguard financial system stability; - (vi) focused reforms to address governance and corruption vulnerabilities; - (vii) broader structural reforms to unlock growth potential. ### Recent macroeconomic outcomes and indicators - Real Gross Domestic Product (GDP) growth reached 5.5 percent in 2024Q3 and averaged 4.3 percent since growth resumed in 2023Q3. - A strong rebound is projected throughout 2024 after 2 years of recession. - Inflation trajectory: - Peak nearly 70 percent in September 2022; - About 2 percent on average since August 2023; - Inflation declined to -1.7 percent in December 2024 due to one-off factors (declines in electricity tariffs and stronger real exchange rate); - Core inflation remained at around 3 percent. - Gross international reserves: US$6.1 billion at end-2024, covering about 3.3 months of imports. - Current account projected surplus: 1.8 percent of GDP in 2024, supported by tourism, remittances, and weak imports. - Banking and fiscal outcomes: - Financial sector stability maintained with increased banking sector capital buffers. - Tax revenues improved in 2024 after new measures. - Primary surplus improved to 2.2 percent of GDP in 2024 (QPC), above the program target of 1 percent and close to medium-term target of 2.3 percent of GDP. - Tax revenue reached the target of 12.4 percent of GDP (QPC) in 2024. - Overall deficit (excluding bank recapitalization costs) expected to improve to about 6.8 percent of GDP (program definition). ### Program implementation status and targets - Many policy changes implemented: tax reforms, cost recovery energy pricing, targeted social safety nets. - All end-June and end-September 2024 quantitative performance criteria (QPCs) and indicative targets (ITs) met, except the IT on social spending. - End-June and end-September headline inflation fell below the MPCC outer lower band. - All end-December quantitative criteria expected to be met, except the SSN IT. - Some structural benchmarks (SBs) due by January-2025 were missed because of the election cycle. - Commitments to implement prior actions (PAs) and SBs and achieve quantitative targets (Tables referenced in source). ### Fiscal policy, 2025 budget, and revenue strategy - Draft Budget for 2025 prepared to target a primary surplus of 2.3 percent of GDP starting 2025 (QPC). - Parliament dissolution delayed approval of the 2025 Budget until 2025Q1; a “Vote on Account” approved for January-April 2025 to maintain essential services. - 2025 Appropriation Bill submitted to parliament in line with program parameters (SB). - Minister of Finance to present the 2025 budget, Appropriation Bill, and Budget Speech (second reading) on February 17 (PA); target to ensure 2025 Budget approved by parliament by end-March 2025 (reset SB). - Revenue measures for 2025: - Adopt measures with an expected yield of 1.6 percent of GDP in 2025 to raise tax revenues to 13.9 percent of GDP in 2025 (QPC). - These measures compensate for: (i) absence of gains from imputed rental income tax in 2025 and 2026, (ii) lower expected yield from improved VAT compliance, and (iii) adjustment of the PIT threshold. - Commitment: if yields do not fully materialize, adopt additional high-quality measures; any overperformance will be locked-in to reduce needed 2026 adjustment. ### Specific tax and revenue measures (legislative actions) - Legislation proposals to parliament (PA) to: - Increase withholding tax rate on interest income from 5 to 10 percent. - Introduce a Corporate Income Tax (CIT) of 15 percent on services export. - Increase CIT rate on betting and gaming, tobacco and liquor industries from 40 to 45 percent. - Introduce VAT on supply of digital services. - Gazette notifications issued to introduce a 30 percent import duty on motor vehicles and relevant regulations eliminating remaining import restrictions on them (PA). - Compensation for PIT threshold adjustment: - PIT schedule to be adjusted effective April 1, 2025. - VAT exemptions on locally manufactured liquid milk and yoghurt. - Both measures estimated to result in a revenue loss of 0.2 percent of GDP that is fully compensated by measures in ¶7. ### PIT schedule adjustment (Text Table 1 reproduced values) - Marginal Tax Rate — Annual Taxable Income (Rs) - 0 — Up to 1.2 mln (Current Regime) / Up to 1.8 mln (From April 2025) - 6 — 1.2-1.7 mln / 1.8-2.8 mln - 12 — 1.7-2.2 mln / - - 18 — 2.2-2.7 mln / 2.8-3.3 mln - 24 — 2.7-3.2 mln / 3.3-3.8 mln - 30 — 3.2-3.7 mln / 3.8-4.3 mln - 36 — Over 3.7 mln / Over 4.3 mln ### VAT compliance, SVAT repeal, and revenue administration reforms - VAT compliance improvement program: - Expected yield revised: 0.1 percent of GDP in 2025 and a further 0.1 percent in 2026. - New structural benchmark: formulate and publish a VAT compliance improvement program by end-May 2025 identifying compliance risks and a detailed plan focused on large and medium businesses. - Program actions: taxpayer education, registration, filing, payment, risk-based verifications, taxpayer field visits. - IRD to receive additional resources for core operations including field inspections; IRD and customs to validate temporary VAT numbers. - SVAT repeal and VAT refund system: - Expedite fixing VAT refund system to ensure full repeal of SVAT by end-September 2025 (reset SB). - IRD prepared a project plan (effective January 1, 2025) and will report results of a simulation exercise by end-June 2025 to test new refund arrangements (new SB). - Ensure manageable number of exporters eligible for refunds and adequate IRD human, IT, and financial resources. - Revenue administration KPIs and modernization: - Continue tracking and reporting KPIs for payment, filing, reporting, and registration with revised/new targets up to December 2025 (SB and annex I). - IRD completed risk profiling of largest 100 High Wealth Individual (HWI) taxpayers and will follow up; high-risk HWIs subject to more intensive checks and audits. - IRD modernization steps with IMF CD assistance: - Cabinet approval of prioritized, time-bound, and costed IT Strategic Plan to deliver RAMIS 3.0; - Streamlined online portal for simplified individual income tax filing; - Enhanced RAMIS to support assessment of 2022/23 corporate income tax returns and reduce taxpayer-official interactions; - Testing stage to enhance RAMIS for individual returns and Social Security Contribution Levy; - Ensure tax collections processed only through RAMIS; accelerate outreach to re-register VAT taxpayers who dropped out in 2020-22. ### Property taxation data and registers - Property and transaction database actions: - Collected information from a representative sample of 5,000 standard properties (SB) to establish a database on estimated current market values by end-December 2024. - Begin digitizing valuation records held by the government valuation department starting with municipal councils, finalizing by end-2025. - Provisional digital nationwide Sales Price and Rents Register (SPRR) established; final SPRR to be established by end-June 2025 (revised and reset SB). - Ensure IRD, valuation department, land registry, and general public have access to SPRR by end-September 2025. - Amend the Notaries Act by April 2025 to ensure comprehensive information on each notarized real property contract is automatically fed into the digital SPRR. ### Primary spending, social measures, and contingencies - Primary spending projected to increase to 12.8 percent of GDP in 2025 (from about 12 percent last year) but remain below 13 percent PFM law ceiling. - Draft budget accommodates: - Wage bill adjustment: 0.3 percent of GDP. - Interest rate subsidy of 3 percent for senior citizens above 60 years of age from July 2025 for 6 months for term deposit account balances below Rs 1 million. - Estimated additional half-year cost: 0.05 percent of GDP in 2025. - Implementation conditions: - Commence the subsidy scheme only after appropriate identity verification system in place. - Ensure timely refunds to commercial banks for valid subsidy payments to avoid arrears. - If costs exceed estimates, execute total spending in line with program parameters by finding savings elsewhere. ### Energy sector, SOE fiscal risks, and tariff policy - Restore cost-reflective energy pricing by allowing the automatic adjustment mechanism to function: - 2024 actions: favorable external conditions and strong rainfall improved CEB financing ability; electricity tariffs reduced in March and July while still providing cost recovery. - Regulator decision to reduce electricity tariffs further by 20 percent on average as of January 17, 2025 resulted in continuous SB on cost recovery electricity pricing not being met. - Measures to ensure cost recovery and fiscal containment: - Use Bulk Supply Transaction Account (BSTA), operationalized in June 2024, to trigger automatic 10 percent tariff increase when CEB buffers reach lower threshold. - CEB will not run arrears; short-term debt will not be allowed to increase to avoid triggering automatic increase. - Ensure tariffs increased to cost recovery level at next tariff revision in April. - Legislative reforms introduced to give Minister of Power and Energy responsibility to implement cost-recovery based electricity price adjustments. - Specific commitments (continuous SBs and IT): - Continue to set retail fuel prices to cost-recovery levels on a monthly basis using agreed formula; compensate CPC for any residual fuel subsidies with on-budget transfers (continuous SB). - Maintain electricity tariff at cost-recovery level overall across different final consumers with quarterly formula-based adjustments effective January 1, April 1, July 1, and October 1; compensate residual electricity subsidies with on-budget transfers and use tariff surcharges between revisions to restore cost recovery if CEB makes losses (continuous SB). - Monitor CEB financial performance continuously and be ready to increase tariffs as soon as losses emerge; finalize dispatch audit of CEB operational costs by end-March 2025. - Set a zero ceiling on the cost of non-commercial obligations for fuel and electricity (net of government transfers) under the program (IT). ### Fiscal data, transparency, and public financial management (PFM) reforms - ITMIS completion expected in May 2025; MOF’s Department of State Accounts to report monthly cash flows by the third business day of the subsequent month. - Preliminary steps to update fiscal reporting framework to GFSM 2014 standard by end-May 2025. - Establish a committee to hold bi-weekly meetings to address timeliness, accuracy, and coverage of fiscal data. - Full implementation of the new PFM law by end-December 2025. - Future Budget submissions starting with 2026 Budget to include all documentation required by PFM law. - Fiscal Strategy Statement (FSS) adopted in June 2024; update and publish FSS with a Fiscal Risks Statement by end-June 2025. - Ensure any future PFM-related bill (including PPP, SOE, procurement, and investment bills) consistent with PFM law. - Fully integrate PPPs with public investment management process and ensure MOF has strong gatekeeper role for evaluating viability and affordability of all projects, including PPPs. *Source: 1lkaea2025001-print-pdf - 1. We remain fully committed to the economic reform program supported by the* ### 18. We will continue to enhance the PFM functions to ensure fiscal transparency and ### 1lkaea2025001-print-pdf - 18. We will continue to enhance the PFM functions to ensure fiscal transparency and ### Public Financial Management (PFM) reforms and budget transparency - Prepare and publish a medium-term PFM Reform Strategy and Action Plan by end-June 2025 to prioritize and sequence PFM reforms. - Integrate the MOF’s recently established Macro-Fiscal Unit into fiscal policy decision making by clearly defining roles and responsibilities and strengthening macro-fiscal analytical, forecasting, and reporting capacity. - Strengthen commitment-based spending controls by introducing a rigorous IT-based commitment control framework. - Expansion of ITMIS to include all budget heads delayed due to lack of sufficient licenses, protracted contract discussions with the vendor, and longer-than-expected time needed for finalization of annual accounts. - A 3-year extension of the contract with the vendor has been approved. - Expect to include the remaining 8 budget heads into ITMIS by end-May 2025. - Completion of the roll-out will improve analytical content of in-year budget execution reports. - ITMIS is envisaged to be integrated with the e-procurement (e-GP) system. ### State-Owned Enterprises (SOEs): restructuring, governance, and financial viability - Fuel sector: - Three foreign companies have entered the fuel retail sector and have started operating 340 fuel stations. - CPC utilized a small margin in the fuel pricing formula to repay US$251 million of old financial obligations; US$161 million remains to be repaid as of end-October 2024, with repayments expected to continue. - CEB (Ceylon Electricity Board): - Adopted new legislation separating generation, transmission, and distribution businesses. - Plan to settle CEB’s remaining legacy debt (incurred prior to 2023), estimated at about Rs. 301 billion as of end-September 2024. - Cabinet approval of the repayment schedule obtained on February 10, 2025 (SB). - Repayments will start in April 2025 and will be included in the electricity tariff calculation starting from the next tariff revision to avoid additional central government budget burden or higher banking sector exposure to SOE debt. - Sri Lankan Airlines (SLA): - Finalize a medium-term strategic plan by February 2025 to restore operational viability and resolve legacy debts. - SOE governance and transparency measures: - Clarify mandates through Statements of Corporate Intent and hold management accountable via key performance indicators. - Review the framework for selecting SOE board members to ensure they are qualified and independent. - Ensure all 52 major SOEs publish audited financial statements by end-June of the following year. - In 2024, 2023 audited statements of 43 SOEs were published. - Remaining nine SOEs face delays with audits, in some cases going back to 2018. - Plan to eliminate the backlog and publish audited 2024 financial statements of all 52 major SOEs by end-June 2025. - Drafting of an SOE law with World Bank assistance to incorporate transparency and governance requirements; will ensure consistency with the PFM Act and that the government has full authority to exercise financial oversight of SOEs. - Will consult with the IMF before submitting the SOE law to parliament. ### SOE borrowing framework and debt governance - New SOE borrowing limited to financing commercially viable activities; subsidies and quasi-fiscal activities to be remunerated through government transfers. - No new borrowing in foreign currency for non-financial SOEs with less than 20 percent of revenues denominated in foreign currency, except for project loans on-lent by the Treasury and short-term trade financing. - New PDM Act: - Lays out principles and processes for government borrowing and debt management, enhancing transparency, accountability, and institutional arrangements. - Establishes requirement of credit risk assessment and collection of risk-based fees for issuance and management of loan guarantees and on-lending. - Implementing regulations introduced with strict eligibility criteria for SOEs and regular disclosure of guarantees and on-lending. - Guarantees on FX borrowing remain allowed on an exceptional basis to facilitate IFI financing to SOEs under very strict conditions. - Ensure SOEs comply with reporting requirements to the MOF under the PFM and PDM laws. - Continue to comply with program ITs on total and FX outstanding stock of treasury guarantees and the limit set under the PFM Act or related regulations. - Strengthened governance and oversight of state-owned banks to ensure lending to SOEs is guided solely by commercial considerations. ### Social Safety Nets (SSN) and Aswesuma program reforms - 2024 implementation challenges: - Missed end-June, end-September, and end-December 2024 social spending ITs due to technical challenges in opening bank accounts for new beneficiaries and delays in completion of second-round applications given the election cycle. - Mobilized village-level administrative officers to support issuance of national identity cards and expedite bank account opening, enabling swift payment of arrears to affected first-round beneficiaries by end-December 2024. - One-off cash transfer of about Rs. 6.6 billion to Aswesuma households with children for school stationery. - Number of households under Aswesuma increased to 1.7 million at end-2024, representing coverage of 25.6 percent of the Sri Lankan population, against an estimated poverty rate of 23.4 percent. - 2025 program commitments: - Maintain Aswesuma coverage above the poverty rate. - Extended the second-round application deadline and resumed enumeration for second-round applicants; aim for full on-boarding of second-round beneficiaries by June 2025 and swift payment of associated arrears. - Parliamentary approval to increase monthly cash transfer amounts: - Poor category: increase by Rs. 1,500 starting January 2025. - Extremely poor category: increase by Rs 2,500 starting January 2025. - Elderly: payments increased by Rs 2,000 starting April 2025. - Disabled and chronic kidney disease patients: payments increased by Rs 2,500 starting April 2025. - Legislation passed to extend payment periods: - Transitional groups through end-March 2025. - Vulnerable groups through end-December 2025. - Expect number of households under Aswesuma to be at 1.6 million by end-2025, representing coverage of 24.4 percent of the population, against an estimated poverty rate of 21.3 percent. - Expect cumulative social spending to increase to Rs. 237 billion in 2025. - A dedicated committee will review eligibility criteria informed by nationally representative surveys, including the 2025 HIES survey. - Full transition of three categorical programs (elderly, disabled, chronic kidney disease) to Aswesuma to be completed by end-June 2025 to centralize SSN cash transfers. - Plan to review SSN design to further alleviate child poverty and malnutrition, and support pregnant women and the disabled. - Empowerment program: - With Rs. 3.5 billion in financial support from the World Bank and ADB, start providing livelihood support to about 24,000 beneficiaries from 2025 through skills training and seed capital to help beneficiaries graduate from Aswesuma. ### Restoring public debt sustainability: targets and restructuring progress - Debt sustainability targets under the EFF program: - Reduce public debt-to-GDP ratio to below 95 percent by 2032. - Reduce central government’s annual gross financing needs below 13 percent of GDP, on average, in 2027-32. - Reduce central government’s annual debt service in foreign currency below 4.5 percent of GDP in every year in 2027-32. - Close balance of payments financing gaps of US$17.1 billion over the EFF program period. - Debt negotiation milestones: - Concluded all components of the Domestic Debt Optimization, including restructuring of FX local law debt originally contracted by CPC to the state banks. - June 2024: final agreements with Official Creditor Committee (OCC) and China EXIM Bank reached; resumed payments to China EXIM Bank; translating OCC agreements into bilateral agreements. - September 2024: agreement in principle (AIP) with bondholders’ steering committee and local banking consortium; AIP aligned with program debt sustainability objectives and OCC’s comparability of treatment (COT) principles. - December 2024: executed bond exchange with 98 percent total participation. - Completed restructuring with China Development Bank and resumed payments in December 2024. - Working on restructuring of remaining small external commercial and official creditors. - Policy commitments on creditor engagement: - Reiterate commitment to refrain from resuming debt service payments to any external commercial or bilateral creditor unless it agrees to comprehensive debt treatment in line with IMF program parameters, debt sustainability targets, and comparability of treatment principle (as in open letter of March 14, 2023). - Commit to transparent communication with all creditors on agreed debt treatments and regular reporting of debt statistics. - Priority to resolve arrears to external creditors as soon as possible and engage remaining creditors in good faith consistent with IMF arrears policies. - Will inform IMF staff, with consent of parties involved, of any tentative debt treatment agreements for timely consistency analysis. ### Debt management and transparency enhancements - Public Debt Management Act (parliament approved June 2024): - Establishes a Public Debt Management Office (PDMO) in line with international best practices. - PDMO effectively established by end-December 2024 (SB); Director General assumed duties on December 2 and staffing completed for key functions. - PDMO to be fully operationalized by end-December 2025. - Publish guidelines for PDMO operation and submit to parliament regulations on on-lending and guarantee activities by March 2025. - PDMO responsibilities: - Report to and be accountable to the MOF with significant operational autonomy. - Formulate medium-term debt strategies (MTDS) and annual borrowing plans (ABP). - Direct implementation of ABPs, including auction cut-off decisions. - Oversee all domestic and international market-based financing decisions and evaluate all debt, derivatives, and guarantees. - Full repeal of the Foreign Loans Act by April 2025 (new SB) to consolidate debt management functions in PDMO. - Strategic debt management: - Formulate and publish a MTDS and an ABP together with the 2026 Budget, as envisaged in the PFM law. - Debt transparency: - MOF publishing a quarterly bulletin of public debt and debt service since February 2023. - Commit to gradually broaden the quarterly bulletin’s coverage to stock and debt service flows of all liabilities and contingent liabilities of the budgetary central government and extra-budgetary central government units. - Issue guidelines regarding statistical treatment of guaranteed debt of distressed corporations and the transfer of government liabilities to SOEs, to be approved by Cabinet. ### Price stability, monetary policy, and external buffers - Inflation targeting and monitoring: - Commit to a price stability mandate of 5 percent inflation target. - Monitoring via Monetary Policy Consultation Clause (MPCC) with mid-point at 5 percent and inner and outer bands of ±1.5 and 3 percentage points in March 2024 and onwards (QPC). - Policy consultation with IMF staff ahead of each Monetary Policy Board meeting. - Non-observance of inner and outer bands requires policy consultation with IMF staff and the IMF Board, respectively (see Technical Memorandum of Understanding). - CBSL to maintain forward-looking real policy rates close to neutral rate level. - Institutional strengthening: - New Central Bank Act (CBA) establishes price stability as primary objective and financial system stability as other objective. - CBA removes government representation from Governing Board and Monetary Policy Board to buttress CBSL operational autonomy. - CBA included an 18-month transitory period to allow monetary financing as a last resort, expiring in March 2025. - November 2024: CBSL transitioned from a dual policy rate system to a single policy interest rate mechanism. - Monetary financing and balance sheet practices: - Continue to refrain from monetary financing; fiscal adjustment, debt relief, and new external financing under program allow sustainable financing without direct central bank credit. - Discontinuation of monetary financing monitored by a QPC on ceiling of CBSL’s net credit to government and a continuous QPC to ensure no purchases of Treasury securities from the primary market. - CBSL to regularly assess its balance sheet and ensure adequate capital for effective monetary policy. - CBSL followed IFRS-consistent practice to record impact of Domestic Debt Optimization on its balance sheet. - CBSL equity has returned to positive levels and is expected to gradually recover. - CBA contains provisions to recapitalize CBSL if necessary. - Exchange rate flexibility and reserves rebuilding: - Committed to exchange rate flexibility and rebuilding international reserves. - Since March 2023, allowed rupee to move in line with fundamentals; limit FX interventions on sale side to truly disorderly market conditions and transparently disclose interventions. - Ensure FX intervention consistent with Net Official International Reserves (NIR) targets. - Encourage financial market deepening and implement IMF TA recommendations. - Commit to meeting program targets on NIR (QPC). - Gradually rebuilding gross international reserves through outright FX purchases, supported by a non-interest current account surplus, new external financing, other non-debt creating inflows, and sovereign debt relief. - Stand ready to undertake outright FX purchases on a net basis of US$2.65 billion between November 2024 and end-2025 to meet reserves target. - Strive to save any overperformance in NIR accumulation. - Have a cap on the adjustor for NIR target in cases of shortfall in project financing. - Phasing out administrative balance of payments measures: - Continue to phase out import restrictions, exchange restrictions, multiple currency practices (MCPs), and capital flow management (CFM) measures as conditions allow. - Import restrictions history: - Over 2020-22 suspended import of many non-priority non-critical goods. - Starting September 2022, gradually lifted temporary restrictions; by October 2023, restrictions on all items except motor vehicles lifted. - September 13, 2024: cabinet approved phased removal of restrictions on motor vehicles by February 2025. - Minister of Finance issued gazettes removing import restrictions on: - Public passenger vehicles and special purpose vehicles on December 18, 2024. - Commercial vehicles on January 27, 2025. - All vehicles including personal vehicles on January 31, 2025, except a few categories specified in the gazette for environmental and safety reasons (PA). - Current exchange restrictions to be eliminated when conditions allow: - Levy of a 2.5 percent stamp duty on credit card transactions abroad. - Levy of a 14 percent remittance tax on nonresidents’ profits. - Limits on repatriation by nonresidents of proceeds derived from current transactions. - Requirement to provide a tax clearance certificate prior to permitting transfers for certain current transactions. - MCPs in place (per IMF’s new MCP policy): - Levy of a 2.5 percent stamp duty on credit card transactions abroad. - Levy of a 14 percent remittance tax on nonresidents’ profits. - Plan to eliminate these when conditions allow. - CFMs: - New CFMs and tightened existing CFMs since 2020, including on payments by residents relating to capital transactions outside Sri Lanka from foreign currency deposit accounts. - Removed surrender requirement for banks on purchases of proceeds from both goods and service exports and inward worker remittances. - Since program approval, relaxed CFMs related to outward remittances on capital transactions by residents and outward transfers of funds by emigrants. - Policy stance on measures: - These measures are not a substitute for comprehensive policy package and macroeconomic adjustment. - Committed to phasing them out as macroeconomic situation stabilizes; revoked some restrictions and developed a phased removal plan shared with IMF Staff for consultation. - During the program period, will not: - Introduce or intensify exchange restrictions or MCPs; - Impose or intensify import restrictions for balance of payments purposes; - Conclude any bilateral payment agreements inconsistent with Article VIII (continuous PC). *Source: 1lkaea2025001-print-pdf* ### 30. We are committed to ensuring a healthy and adequately capitalized banking system. ### We are committed to ensuring a healthy and adequately capitalized banking system. ### Banking system health and recapitalization - Banks faced elevated credit risk in their credit to both the private and public sectors. - Restructuring of the CPC FX loans held by the two largest state-owned banks was concluded in December 2024 when parliament approved the reclassification of the agreed cash injection amount in the 2024 budget from a capital expenditure allocation to a current expenditure allocation (SB). - The CBSL completed the assessment of the recapitalization plans of seven largest domestic banks in December 2023 and monitored their implementation, which was concluded, without the need for capital injections from the government, by end-December 2024 (SB). - Going forward, CBSL actions: - Continue to monitor the capital position of banks through forward-looking stress tests. - Stand ready to impose capital requirements under Pillar 2 of the Basel capital standards, if needed. - Will not renew the suspension of Parate executions beyond June 2025 (new SB) because it negatively affects banks’ ability to recover value from non-performing loans and their capacity to provide credit at lower rates. ### Financial sector supervision, crisis management, and regulation - Implementation of amendments to the Banking Act to enhance supervision completed in June 2024, with introduction of necessary CBSL regulations (SB). - Following enactment of the Banking (Special Provisions) Bill in September 2023 to strengthen CBSL’s crisis management powers, CBSL will continue implementing resolution powers for licensed banks and enhancing the mandate of the Sri Lanka Deposit Insurance Scheme with support of the ADB and the World Bank. - CBSL is reviewing: - Finance Business Act to enhance supervision, regulation, and resolution framework of finance companies. - Finance Leasing Act to address irregularities in the finance leasing business. - Amended bill on Finance Business Act will be submitted to parliament by end-September 2025. - CBSL issued multiple Banking Act Determinations and Directions in 2024, including but not limited to: - Banking Act Determination no. 1 of 2024 on Statutory Liquidity Ratios of Licensed Banks. - Banking Act Directions no. 2 of 2024 on offshore banking business. - Banking Act Directions no. 1 of 2024 on large exposures of licensed banks. - Banking Act Directions no. 05 of 2024 on Corporate Governance. - Banking Act Determination no.04 of 2024 on Approved Securities for accommodation granted to related parties. - Gazette No. 2404/33 on limits for accommodation granted to related parties. ### Strengthening resilience and governance of state-owned banks (SOBs) - Amendments to the Banking Act ensure SOBs meet same regulatory requirements as private banks (large exposures, related party lending, appointment of directors and key management, governance). - Cabinet action in May 2024: - Adopted and published a framework for SOBs to have a majority of independent directors. - Nominations for board and senior management to be made by banks’ nomination committees following open search procedures with clear requirements for independence and professional experience (SB). - Commitments by March 2025: - Ensure SOB boards of directors have not less than nine and not more than 13 members. - Nominate several independent directors such that independent directors comprise the majority of the total number of directors of each SOB board, one of whom shall be Chair of the Board of each of the banks. - March 2024 CBSL action: issued Banking Act Directions on Large Exposures for Licensed Banks aimed at ensuring SOBs are run at arm’s length from the government and lend to SOEs on a commercial basis and within standard prudential limits on concentration. - September 2024 CBSL action: issued Banking Act Directions on Corporate Governance for Licensed Banks strengthening Board responsibilities, risk governance structure, and Board oversight of senior management. ### Anti-corruption, governance, and institutional measures - Government Action Plan published in February 2024; Action Plan will be updated and published in February 2025 (new SB). Implementation performance to be reviewed quarterly. - AC legal frameworks and institutions: - New AC Act enacted in August 2023 significantly strengthens CIABOC’s investigative power and asset and income declaration frameworks. - Asset declarations of 200 senior officials were published in 2024 in line with the AC Act (SB). - CIABOC Commissioners have established an open and transparent process for candidate selection, including for the new Director-General, and have published asset declarations for senior officials in line with the AC Act. - CIABOC-related commitments and timelines: - Publish a strategic plan for CIABOC and submit CIABOC’s annual budget to the MOF to be incorporated in the 2025 Budget by mid-March 2025 (SB). - Enact a comprehensive Asset Recovery Law to harmonize it with the United Nations Convention Against Corruption by end-April 2025 (reset SB). - Strengthen the asset declaration system by June 2025 (new SB) with measures to: - Allow public access to published declarations through foreign and local phone numbers or email accounts and posted forms to be downloadable. - Publish remaining asset declarations of senior officials along with list of non-filers. - Revise existing form to include beneficial ownership information. - Modify current rules on redactions so that information on the value of bank accounts and other assets is disclosed to the public. - Produce a report on compliance and adoption rate of the enhanced asset declaration. - Review the selection process for CIABOC Commissioners and Director General to identify reforms to improve transparency and merit-based selection. ### Tax policy, revenue administration, and public financial management (PFM) - Tax policy: - No longer providing any tax exemptions or incentives; no longer approving new projects under the Strategic Development Projects (SDP) Act since December 2023. - First tax expenditure statement published in 2024 assessing the value of all tax exemptions. - Any new tax proposals to attract investments will be consulted with IMF staff prior to implementation. - Publication and legislative commitments: - Continue to publish, on the designated websites (Promise and MOF) on a semi-annual basis: - All public procurement contracts above Rs. 1 billion. - The list of firms receiving tax exemptions through BOI, SDP, and the Port City Acts (for Port City Act, publication will start in June 2025) and estimated values of the exemptions. - The list of firms receiving tax exemptions on luxury vehicle imports (revised SB). - Improve the annual tax expenditure statement incorporating IMF TA recommendations by June 2025. - Submit to parliament by end-August 2025 amendments to the SDP Act, consistent with IMF TA, to introduce transparent, rules-based eligibility criteria and limit duration of incentives (reset SB). - Introduce transparent, rules-based eligibility criteria and duration limits on incentives under the Port City Act by end-September 2025. - Revenue administration: - Each revenue department developed an implementation plan to launch a program of anti-corruption measures to strengthen Code of Conduct, Internal Affairs department, risk management and automation in August 2024 (SB). - IRD strengthened information sharing with CIABOC and introduced a simplified PIT return that can be filed via mobile phone technology. - Commitments and timelines: - Each revenue department to provide quarterly updates to Ministry of Finance on implementation progress beginning from March 2025. - Establish a new Tax Crimes Investigation (TCI) unit within IRD, separate from standard audit functions, by end-February 2025. - Approve necessary legislation by end-June 2025 to mandate Customs Department of Sri Lanka (CDSL) with clear and unfettered responsibility for clearance, movement, and control of goods to and from the special economic zones (SEZ). - Enhance customs compliance by: - Implementing more robust risk assessment so that percentage of shipments assigned to the green channel approaches 80 percent. - Closing the long rooms and eliminating face-to-face document review of customs declarations prior to their formal submission. - PFM and procurement: - Operationalized the National Procurement Commission and adopted an action plan. - Commitments: - Enact a Public Procurement Law by end-June 2025 reflecting international good practice, coordinating with ADB and WB for technical support. - Further strengthen the e-procurement system and work to eliminate procurement contracts awarded through a non-competitive process. - Pilot national and international competitive bidding under the digital platform beginning in March 2025; full roll-out planned by end-June 2025. - Continue implementation of the SOE Policy, including explicit policy on management of state financial assets, and ensure appointments of SOE officers and directors follow rigorous, transparent, merit-based processes. - Public asset oversight and management: - Study options and submit to Cabinet proposed criteria for allocating rights to public assets with timeline to bring existing laws and regulations in compliance with policy by March 2025. - Make adjustments to regulations implementing the National Audit Act to facilitate effective levying of fines on officials, including Chief Accounting Officers, who fail oversight responsibilities by June 2025. ### AML/CFT and beneficial ownership - AML/CFT National Policy for 2023-2028 developed based on the National ML/TF Risk Assessment (NRA) result. - Strengthening AML/CFT regime to address illicit finance risks and prepare for comprehensive AML/CFT assessment by the Asia Pacific Group on Money Laundering in 2026. - Commitments and timelines: - Final stages of introducing amendments to the Companies Act to bring the beneficial ownership framework in line with FATF standards for adoption by end-April 2025. - Implement measures to improve effectiveness of ML investigations, prosecutions, and asset recovery: increase number of investigations related to NRA threats, develop confiscation policy guidelines, and build capacity of prosecutors, investigators, and judiciary. - Strengthen use of financial intelligence to identify potential corruption activities and cooperation between FIU, law enforcement, and CIABOC to facilitate parallel investigations. - Improve risk-based AML/CFT supervision of financial institutions through strengthened supervisory capacity and regular supervisory engagements focused on compliance with beneficial ownership requirements and enhanced due diligence for politically exposed persons. ### Growth-enhancing structural reforms - Near-term focus: stabilizing the macro economy and restoring debt sustainability; start developing structural reforms to build stronger and more inclusive growth. - Trade and external sector: - Fully committed to trade liberalization; adopted regulations to rationalize para-tariffs and will implement plan with attention to revenue implications and complementary measures to support local businesses. - Implement a National Export Strategy while expediting negotiations of Free Trade Agreements and entry into regional trade blocs. - Implement initiatives to improve competitiveness and position in Global Value Chains; develop industry sector for domestic and global markets. - Transform information technology, business process outsourcing, and Tourism sectors to key service exports. - Labor, human capital, and inclusion: - Labor market reforms to improve quality and quantity of labor and promote female labor force participation as a counterforce to population aging. - Develop a comprehensive actionable strategy that can include reforms to: - Labor laws to improve labor market flexibility (for example the proposed Employment Act to unify existing labor laws and introduce measures to improve labor force participation). - Education sector to improve labor productivity and close gender gaps. - Promote financial inclusion including through credit guarantee schemes supporting female entrepreneurs. - Increase quantity, quality, and affordability of child and elderly care facilities. - Climate and energy: - Address climate-related vulnerabilities with focus on agriculture, livelihoods, and food security. - Enhance electricity generation from renewable energy, led by annual additions of solar and wind capacity; private sector and multilateral financing expected to help meet envisaged annual investment. - Engage with multilateral partners to build technical capacity for rapid implementation of climate mitigation and adaptation. - Broader reforms with development partner support: - Address impediments to private investment, large role of public sector, inefficient electricity sector, and climate change. - Potential reform targets: - Reduce red tape and modernize regulatory and doing business environment. - Reduce electricity cost by improving generation mix and electricity distribution efficiency. - Reduce government’s and SOEs’ role to enable more efficient allocation of resources, foster competition, and boost productivity. - Strengthen climate change adaptation, including contingency budget and insurance scheme for natural disasters. - Enact the Rescue, Rehabilitation and Insolvency Bill to provide orderly insolvency processes, support NPL recovery, and allow banks to allocate capital efficiently to new credit in support of growing economy. *Source: 1lkaea2025001-print-pdf - 30. We are committed to ensuring a healthy and adequately capitalized banking system.* ### 42. We stand ready to deploy contingency measures should downside risks materialize. ### 1lkaea2025001-print-pdf - 42. We stand ready to deploy contingency measures should downside risks materialize. ### Risks and Contingency Measures (¶42) - Risks to program implementation remain high, given adverse initial conditions and a complex debt restructuring. - Remedial measures for program underperformance: - Prioritize revenue administration reforms to improve compliance to mitigate risks of revenue shortfalls. - Use targeted spending cuts as the last line of defense instead of depending solely on capital expenditure reductions. - Monetary policy stance: - "We stand ready to tighten monetary policy on a data-driven basis should inflation upside risks materialize." - Foreign exchange and reserves: - Slippages in the reserves buildup would require the introduction of explicit FX intervention rules to avoid hindering necessary exchange rate adjustment. - Program overperformance: - "Program overperformance resulting from better-than-expected outturns should be locked-in to the extent possible, to help achieve program objectives." - Program monitoring: - Weekly monitoring meetings with the IMF to report progress and discuss strategies to meet commitments. ### Program Monitoring and Safeguards (¶¶43–45) - Review and targets: - Program subject to semiannual reviews with performance criteria, MPCC bands, and indicative targets set out in Table 1 and structural benchmarks in Table 2 attached to this MEFP and TMU. - Use of IMF financing: - Authorities continue to request IMF financing for budget support; the Memorandum of Understanding between the CBSL and the Ministry of Finance on responsibilities for servicing financial obligations to the IMF continues to apply. - Safeguards: - Safeguards assessment of the Central Bank was finalized in February 2023. - The CBA would serve to address some identified safeguard issues; CBSL has initiated steps to implement other safeguards recommendations. - Requests to the Board: - Approval requested for modification of existing and introduction of new quantitative targets and SBs listed in Tables 1 and 2. - Request that the Board completes the required MPCC Consultation as inflation breached the end-June and end-December 2024 lower outer MPCC band. ### Selected Quantitative Performance Criteria and Indicative Targets (Table 1 — selected lines) - Central government primary balance (floor, in billion rupees): - end-June IT: 70; Actual: 316; Status: Met - end-Sept Proposed IT/PC and outturns shown across reviews (e.g., end-Dec Proposed IT: 300; Outturn: 653.5; Status: Met) - Program net official international reserves (Program NIR, floor, end of period stock, in million US$) 1/ 2/: - Examples of values: -2,035; -1,368 (Met); -1,710; -1,951; -650 (Met); -1,524; -474 (Met); -1,338; -1,212; 322 (Met); -1,088; -675; -595; -2333 - Net credit to the government of the CBSL (ceiling, end of period stock, in billion rupees) 3/: - Examples of values: 2,800; 2,691 (Met); 2,720; 2,593 (Met); 2,560; 2,515 (Met); and repeated target values 2,560 - Central government tax revenue (floor, in billion rupees): - Examples: 750; 837 (Met); 1,500; 1,709 (Met); 2,400; 2,689 (Met); 3,700; 3,705 (Met); Proposed series including 850, 800, 1,650, 2,750, 4,350 - Continuous performance criteria (cumulative): - New external payment arrears by the nonfinancial public sector and the CBSL (ceiling, in million US$): 0 (Met across periods) - CBSL purchases of government securities in the primary market: 0 (Met across periods) - Monetary policy consultation clause — Year-on-year inflation in Colombo Consumers Price Index (in percent) 4/: - Outer band (upper limit): 8.0 - Inner band (upper limit): 6.5 - Actual / Center point examples: 5.0; 4.3 (Met); 5.0; 5.0; 1.4 (Not Met); 5.0; 0.8 (Not Met); 5.0; 5.0; -1.5 (Not Met) - Inner band (lower limit): 3.5 - Outer band (lower limit): 2.0 - Indicative targets: - Social spending by the central government (floor, in billion rupees): examples include 50; 31 (Not met); 100; 85 (Not Met); 150; 128 (Not Met); cumulative proposals including 565, 311, 418, 1237 - Treasury guarantees (ceiling, in billion rupees): 2,100; 1,692 (Met); repeated target 2,100; observed values e.g., 1,646 (Met); 1,565 (Met) - Treasury FX guarantees (ceiling, in billion rupees): 1,275; 1,008 (Met); repeated target 1,275 Notes in Table 1 (verbatim terminology): - 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. - 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 in FX terms, (iii) external commercial loans (including Eurobonds and syndicated loans) by the central government, (iv) the amount of project loans and grants FX cash flows disbursed to the central government, and (v) proceeds from commercialization of public assets to non-residents, that are higher/lower than assumed under the program; and by the cumulative amounts of (vi) amortization of total external debt owed by the central government (excl.IMF), (vii) interest payments on total external debt owed by the central government, (viii) interest payments on SLDBs and FCBUs by the central government in US dollar terms, and (ix) amortization and interest payments in FX for restructured CPC loans, that are lower/higher than assumed under the program. See TMU for details. - 3/ Excludes holdings of treasury securities for monetary policy purposes and Rupee-denoimated government deposits. See TMU for details on the calculation for the test date. - 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. ### Structural Benchmarks and Prior Actions (Table 2 — selected items and statuses) - Revenue and fiscal: - Submit to parliament amendments to the VAT Act and Inland Revenue Act and issue relevant gazette notifications to introduce revenue measures (detailed in ¶7) to underpin revenue mobilization in 2025 — Gazette on import duties for motor vehicles issued. Others expected prior to the Board meeting. - Presentation by the Minister of Finance to parliament of the 2025 annual budget document, the Appropriation Bill and the Budget Speech (second reading) in line with program parameters (¶5) — Expected prior to the Board meeting. - Issue relevant gazettes eliminating all remaining import restrictions — Met. - Fuel and electricity pricing and compensation: - Set retail fuel prices to cost-recovery levels with monthly formula-based adjustments, and compensate the CPC for providing any fuel subsidies with on-budget transfers — Continuous — Met. - Maintain cost-recovery level of the end-user electricity tariff schedule with quarterly formula-based adjustments; compensate electricity sector for residual subsidies with on-budget transfers; use tariff surcharges in the interim if CEB is making losses — Continuous — Not Met as of January 17, 2025. - Fiscal strategy and governance: - Obtain Cabinet approval of the fiscal strategy statement (FSS) containing a medium-term fiscal framework (MTFF) — End-June 2024 — Met. - Fully operationalize the BSTA by adopting the rule requiring the regulator to use it to determine the cost-recovery based electricity tariff and government transfer requirement — End-June 2024 — Met. - Submission to parliament of revenue measures to support fiscal consolidation during 2025, in line with program parameters — End-June 2024 — Not Met. - Revenue administration and IT: - Collect information from a representative sample of 5,000 standard properties including key variables — End-August 2024 — Met. - Obtain cabinet approval of a prioritized, time-bound, and costed IT Strategic Plan to deliver RAMIS version 3.0 — End-August 2024 — Not Met. Implemented with Delay on September 9. - Track and report the updated quarterly KPIs of tax compliance (Annex IV) — End-August 2024/End November 2024 — Met/Not Met. - Appropriation Act and spending allocations: - Submission to parliament for the first reading of the 2025 Appropriation Bill that is in line with program parameters — End-October 2024 — Not Met. Implemented with delay on December 27, 2024. - Parliamentary approval of the 2025 Appropriation Act and spending allocations in line with program parameters — End-December 2024 — Not Met. Reset to end-March 2025. - Energy sector legacy debts: - Obtain cabinet approval of the repayment schedule of CEB’s legacy debts, starting in April 2025 — End-December 2024 — Not Met. Implemented with delay on February 10, 2025. - New and reformulated SBs (select future items and dates): - Establish a digital SPRR — End-June 2025 — Newly Proposed and Reformulated SBs. - Track and report updated quarterly KPIs of tax compliance (Annex I) — End-February 2025, end-May 2025, end-August 2025 and end-November 2025. - Parliamentary approval of the 2025 Appropriation Act and spending allocations in line with program parameters — End-March 2025. - Formulation and publication of a VAT compliance improvement program — End-May 2025. - IRD to report results of a simulation exercise to test new refund arrangements once SVAT is repealed — End-June 2025. - Abolish the SVAT system — End-September 2025. - Cabinet approval of revenue measures requiring legislative amendments to support fiscal consolidation during 2026 — End-September 2025. - Submission to parliament for the first reading of the 2026 Appropriation Bill in line with program parameters — End-October 2025. - Parliamentary approval of the 2026 Appropriation Act and spending allocations in line with program parameters — End-December 2025. - Financial sector and governance SBs (selected statuses and notes): - Implementation of amendments to the Banking Act — End-May 2024 — Not Met. Implemented with delay on June 15, 2024. - Completion of the recapitalization for two largest State-owned banks including restructuring of CPC FX loans — End-August 2024 — Not Met. Implemented with delay on December 13, 2024. - Completion of the recapitalization for private sector banks — End-December 2024 — Met. - Establish Public Debt Management Office (PDMO) in consultation with IMF staff — End-December 2024 — Met. - Parliament to repeal the Foreign Loans Act in full — End-April 2025 (Newly Proposed). - Parliament to lift the moratorium on enforcement of collateral introduced during the pandemic to permit foreclosures by creditors under the Parate Law — End-June 2025 (Newly Proposed). - Governance SBs including requirements for majority independent boards of public banks and publication of procurement and tax exemption information — multiple items noted as Met or Not Met with specified dates and reset dates. ### KPIs for Inland Revenue Department (Annex I — selected KPIs and targets) - KPI-1.1: Risk Based Audit - Objective: Shift to data-driven, risk-based audit case selection and assignment, away from discretion-based selection. - Baseline: "No cases are currently selected on a systematic, data-driven, risk basis." - Targets and outcomes (quarterly sequencing under EFF): - Target: 10 LTO cases selected; Outcome: 25 cases selected. - Target: 20 new LTO cases selected; Outcome: 21 cases selected. - Target: 30 new LTO cases selected & 2 percent of new non-LTO cases selected; Outcome: 38 LTO cases & 2 percent of non-LTO cases (18). - Subsequent quarterly targets include selecting 40, then 50 new LTO cases and increasing non-LTO case selection percentages to 5 percent and then 10 percent across quarters. - KPI-1.2: Audit Effectiveness for LTOs - Definition: The strike rate is the percent of completed audit cases that resulted in an adjustment that increased the tax liability by 5 percent or more than the taxpayer’s self-declared. - Baselines currently unknown and must be determined using historic data for different taxpayer segments: large, upper corporate, medium corporate. - No Target specified for early quarters; definition repeated across target columns. - KPI-2.1: Tax Return Filing Compliance of Large Taxpayers - Metric: Percentage of expected tax returns from large taxpayers by the due date for VAT, PAYE, CIT. - Baseline from 2023 TADAT Assessment (P4.12): On-Time CIT Filing: 93.4 percent; On-Time VAT Filing: [table continues beyond the supplied excerpt]. *Source: Authorities; and IMF Staff.* ### 82.6 percent ### 1lkaea2025001-print-pdf - 82.6 percent ### KPI-2.2: Tax Return Filing Compliance of Non-Large Taxpayers - Definition: Percentage of expected tax returns from non-large taxpayers filed by the due date. - Baseline (From 2023 TADAT Assessment (P4.12)): - On-Time CIT Filing: 32 percent - On-Time VAT Filing: 45.5 percent - PAYE Filing: 23.6 percent - Baseline figure shown: 82.6 percent (contextual placement in source). - Targets and Outcomes (selected chronology as presented): - Target: 48 % of VAT returns on-time → Outcome: 66% achieved - Target: 52 % of VAT returns on-time → Outcome: 54% achieved - Target: 56 % of VAT returns on-time → Outcome: 55.8 % of VAT returns on-time - Target: 60 % of PAYE returns on-time → Outcome: 12% achieved - Target: 85 % of VAT returns on-time → Outcome: 95 % of VAT returns on-time - Target: 87 % of VAT returns on-time → Outcome: 88% achieved - Target: 90 % of PAYE returns on-time → Outcome: 56% achieved - Target: 89 % of VAT returns on-time → Outcome: 89.6 % of VAT returns on-time - Target: 91 % of VAT returns on-time & 95 % of CIT returns on-time → Outcome: 95 % of VAT returns on-time - Target: 95 % of VAT returns on-time & 90 % of PAYE returns on-time → Outcome: 95 % of VAT returns on-time - Target: 95 % of VAT returns on-time & 95 % of CIT returns on-time → (Outcome entries for these combined targets appear as repeated 95 % of VAT returns on-time) - Intermediate quarter targets include: 60 % of VAT returns on-time & 50 % of CIT returns on-time; 67 % of VAT returns on-time & 60 % of PAYE returns on-time; 70 % of VAT returns on-time & 60 % of CIT returns on-time. - Reporting cadence: KPI Baseline March 2024; Target & Outcomes June 2024; Target & Outcomes September 2024; Targets December 2024 through Proposed December 2025. ### KPI-2.3: Electronic Filing of Individual Income Tax (IIT) Returns - Note: First three quarters reflect 2022/23 IIT returns; Q4 reflects 2023/24 IIT return. - Baseline (From 2023 TADAT assessment (P4.14)): 23 percent of IIT returns filed electronically in 2021. - Targets and Outcomes: - Target: 30 % filed electronically → Outcome: 33% achieved - Target: 35 % filed electronically → Outcome: 34% achieved - Target: 40 % filed electronically → Outcome: 34.2% achieved - Subsequent proposed targets: 50 % filed electronically; 60 % filed electronically; 60 % filed electronically; 60 % filed electronically; 80 % filed electronically. ### KPI-3.1: Management of Collectible Debt - Definition: Collectible debt is that portion of arrears owed to IRD that is not subject to dispute and where there is no legal impediment to collection action. - Baseline (From 2023 TADAT assessment (P5.18)): - At end of 2021, ratio of collectible debt to annual collections was 13.75 percent, deteriorated to 15.4 percent by end-2022. - Targets and Outcomes: - Target: Collectible debt is not above 15 % of 2024 revenue target → Outcome: 9.2% achieved - Target: Collectible debt is not above 14 % of 2024 revenue target → Outcome: 8.3% achieved - Target: Collectible debt is not above 13 % of 2024 revenue target → Outcome: 8.3% achieved - Later targets: Collectible debt is not above 12 % of 2024 revenue target; not above 11 % of 2025 revenue target; not above 10 % of 2025 revenue target; repeated not above 10 % of 2025 revenue target entries for Proposed June, Sept, December 2025. ### KPI-4.1: VAT Registration - Context: Registered VAT population nearly 29,000 before 2019 changes and fell to 12,000; IRD seeks to rebuild VAT and SSCL taxpayer base to 20,000 by end-2024. - Targets and Outcomes: - Target: 14,000 active VAT and SSCL registered taxpayers → Outcome: VAT – 17,209; SSCL – 8,190 - Target: 16,000 active VAT and SSCL registered taxpayers → Outcome: VAT – 18,902; SSCL – 10,241 - Target: 18,000 active VAT & 11,000 SSCL registered taxpayers → Outcome: VAT – 20,214; SSCL – 11,269 - Subsequent proposed targets: - 20,000 active VAT & 12,000 SSCL registered taxpayers - 22,000 active VAT & 13,000 SSCL registered taxpayers - 23,000 active VAT & 14,000 SSCL registered taxpayers - 24,000 active VAT & 15,000 SSCL registered taxpayers - 25,000 active VAT & 16,000 SSCL registered taxpayers ### Annex II. Consultation with the IMF Executive Board on Missed Inflation Target Under the MPCC — Key Findings - Inflation outcomes: - Inflation decelerated to 1.4 percent in Q2 2024 and -1.5 percent in Q4 2024, both below the outer bound of the MPCC band of 2.0 percent. - Identified drivers of lower-than-expected inflation in Q2, Q3, and Q4 2024: - Energy and Transport Price Reductions: - Electricity tariff reductions: 22 percent (March 2024) and 22.5 percent (July 2024). - Multiple domestic fuel and LP gas price reductions implemented; reductions larger than anticipated. - Exchange Rate Appreciation: - Sri Lankan rupee appreciated by 6.0 percent against the US dollar during the first six months of 2024. - Rupee appreciated by 10.7 percent cumulatively in 2024. - Appreciation contributed to lower import costs and reduced inflationary pressures. - Improved Domestic Supply Conditions: - After a temporary early-2024 food inflation increase, food prices moderated for the remainder of the year, supported by a strong harvest and easing supply chain bottlenecks. - Limited Second-Round Effects of Tax Adjustments: - Value Added Tax rate increased and several tax exemptions removed in January 2024; initial headline inflation rise had muted second-round effects due to subdued demand. ### Policy Response (CBSL actions in 2024) - Monetary easing: - Total policy rate reduction of 125 basis points in 2024, comprised of: - 50 basis points cut in March - 25 basis points cut in July - 50 basis points cut in November - Operational measures: - Transition to a single policy interest rate framework effective on November 27. - Active open market operations to align short-term money market interest rates with policy stance. - Market deposit and lending interest rates adjusted downward; credit to the private sector showed expansion. - CBSL vigilance: - Identified upside inflation risks: global commodity price volatility, relaxation of import restrictions, wage increases, demand recovery, potential domestic supply disruptions (including weather). - CBSL remains committed to price stability and stands ready to take additional measures. ### Inflation Outlook (CBSL forecasts) - Near-term projection: - Deflation expected to continue in Q1 2025, driven by base effects. - Headline inflation projected to turn positive towards mid-2025 and gradually converge to 5 percent target thereafter. - Policy stance: - Convergence supported by appropriate monetary policy adjustments, demand recovery, and exchange rate adjustment. - CBSL will closely monitor policy impact and global/domestic developments and is prepared to act as necessary. ### Technical Memorandum of Understanding (TMU) — Monitoring Framework Highlights - Purpose: Framework for monitoring performance under the Extended Arrangement under the EFF; specifies performance criteria and indicative targets with semiannual reviews. - Listed quantitative performance criteria and indicative targets include: - (a) Central government primary balance (floor) - (b) Central government tax revenue (floor) - (c) Stock of expenditure arrears of the central government (ceiling) - (d) Net official international reserves (floor) - (e) CBSL’s net credit to the government (ceiling) - (f) Continuous criterion on new external payment arrears of the nonfinancial public sector and the CBSL (ceiling) - (g) Performance criterion on new CBSL purchases of government securities in the primary market - (h) Monetary policy consultation clause - (i) Indicative target on social safety net spending (floor) - (j) Indicative target on cost of non-commercial obligations for fuel and electricity (net of government transfers) (ceiling) - (k) Indicative target on treasury guarantees (ceiling) - (l) Indicative target on foreign exchange treasury guarantees (ceiling) - Definitions and measurement notes: - Central government definition 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. - Primary balance and measurement approach follow GFSM1986; 2023 primary balance example: Rs 173 billion (overall balance Rs. minus 2,282 billion; interest payment Rs 2,456billion). - Program NIR measurement specified with conversion at program exchange rates and gold price prevailing on January 3, 2023; monetary gold valued at US$1,831.615 per troy ounce. - Table of Program Exchange Rates (Rates as of January 3, 2023) and Memorandum: - Sri Lanka rupee 363.11 - British pound 0.838012 - Japanese yen 132.650000 - Canadian dollar 1.365800 - Euro 0.948317 - Chinese yuan 6.892800 - Australian dollar 1.497006 - Swiss franc 0.939650 - SDR 0.752014 - Memorandum: Gold price, US$/oz 1831.62 *Source: 1lkaea2025001-print-pdf - 82.6 percent* ### 11. If (i) the amount of foreign program financing (exclusive of EFF disbursements) by the ### 11. If (i) the amount of foreign program financing (exclusive of EFF disbursements) by the ### Adjustors to the Program Net International Reserves (NIR) Floor - If any of the following in U.S. dollar terms are higher/lower than assumed under the program, the floor on the program NIR will be adjusted upward/downward by the maximum of the cumulative differences on the test date and the caps on the adjustors as specified: - (i) the amount of foreign program financing (exclusive of EFF disbursements) by the central government; - (ii) the amount of net borrowings from SLDBs and FCBUs by the central government in FX terms; - (iii) the amount of external commercial loans (including international sovereign bonds and syndicated loans) borrowed by the central government; - (iv) the amount of project loans and grants disbursed as FX cash flows to the central government; - (v) proceeds from commercialization of public assets to non-residents. - Proceeds from commercialization of public assets are 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 2022 and thereafter. ### Adjustor on External Debt Amortization and Interest (NIR impact) - If the sum of: - amortization of total external debt and interest payments on total external debt owed by the central government (excluding IMF) in U.S. dollar terms, and - interest payments on SLDBs and FCBUs by the central government in U.S. dollar terms, as set out in Table 2a. or 2b., 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. - Total external debt refers to external debt owed by the central government to all foreign creditors (excluding IMF), as defined in the 2013 External Debt Statistics: Guide for Compilers and Users. - These adjustors apply to the NIR floor for end-December 2022 and thereafter. ### Table 2a. Sri Lanka: Program Assumptions (2024) (Cumulative from the beginning of each calendar year, in million US$) - Mar. 2024 / Jun. 2024 / Sep. 2024 / Dec. 2024 - Foreign program financing of the central government: 425 / 650 / 800 / 800 - Net borrowings from SLDBs and FCBUs by the central government in FX terms: 0 / 0 / 0 / 0 - External commercial loans (including Eurobonds and syndicated loans) by the central government: 0 / 0 / 0 / 0 - Proceeds from commercialization of public assets to non-residents: 0 / 0 / 0 / 0 - Amortization of total external debt owed by the central government (excl. IMF): 187 / 374 / 561 / 748 - Interest and Amortization payments on FX restructured CPC loans by central government: 25 / 50 / 75 / 100 - Interest payments on total external debt owed by the central government and central bank (excl. IMF): 308 / 615 / 919 / 1,226 - Interest payments on SLDBs and FCBUs by the central government in US dollar terms: 0 / 0 / 0 / 0 - Project loans and grant FX cash amounts disbursed to the central government: 105 / 210 / 315 / 420 ### Cap on Project Loans and Grants Adjustor - The adjustor on the amount of project loans and grants disbursed as FX cash flows to the central government will be capped at US$250 million in 2024 and 2025. - The other adjustors will be uncapped. ### Table 2b. Sri Lanka: Program Assumptions (2025) (Cumulative from the beginning of each calendar year, in million US$) - Mar. 2025 / Jun. 2025 / Sep. 2025 / Dec. 2025 - Foreign program financing of the central government: 188 / 288 / 573 / 783 - Net borrowings from SLDBs and FCBUs by the central government: 0 / 0 / 0 / 0 - External commercial loans (including Eurobonds and syndicated loans) by the central government: 0 / 0 / 0 / 0 - Proceeds from commercialization of public assets to non-residents: 0 / 0 / 0 / 0 - Amortization of total external debt owed by the central government (excl. IMF): 370 / 741 / 1,111 / 1,481 - Interest and Amortization payments on FX restructured CPC loans by central government: 58 / 116 / 174 / 232 - Interest payments on total external debt owed by the central government (excl. IMF): 290 / 580 / 870 / 1,159 - Interest payments on SLDBs and FCBUs by the central government in US dollar terms: 0 / 0 / 0 / 0 - Project loans and grants disbursed to the central government: 175 / 350 / 525 / 700 ### Outperformance Provision - If NIR outcome outperforms its program target(s), the CBSL will consult with IMF staff on raising the targets for subsequent test dates accordingly to safeguard such overperformance. ### Performance Criterion on the CBSL’s Net Credit to the Government (NCG) - NCG is measured as the difference between: - (a) The CBSL’s claims on the central government, which include provisional advances, government securities acquired by the CBSL through primary market purchases, the central government’s special direct issuances to the CBSL, and long-term or outright open market operations. - For program monitoring, temporary purchases of government securities by CBSL (monetary policy operations or ELA) with an agreement to reverse in less than 90 days are excluded. - The stock of government securities held by the CBSL is measured in face value. - (b) The central government’s Rupee-denominated deposits at the CBSL. - Deposits related to foreign program financing (including IMF disbursements) placed at the government’s account at the CBSL are not part of the central government’s Rupee-denominated deposits at the CBSL. ### Adjustment to the NCG Ceiling - The ceiling on the CBSL’s NCG will be adjusted upward by the amount of shortfalls in foreign program financing of the central government (measured against programmed amounts as set out in Table 2). - This adjustor will only apply to the NCG ceiling during six months after the Board date of the First review. - Foreign currency amounts will be converted to Sri Lankan rupees using the program exchange rates defined in paragraph 9. ### Continuous Performance Criteria: New External Payment Arrears - A continuous performance criterion prohibits the accumulation of new external payments arrears on external debt contracted or guaranteed by the nonfinancial public sector and the CBSL. - Definitions and exclusions: - Nonfinancial public sector follows the 2001 Government Finance Statistics Manual and the 1993 System of National Accounts. - External payments arrears consist of debt-service obligations (principal and interest) to nonresidents not paid when due, subject to applicable grace periods. - Overdue debt and debt service obligations in dispute are not considered external payments arrears for program monitoring. - Arrears where a rescheduling or restructuring agreement is being sought are excluded. - The continuous performance criterion will be monitored continuously and any non-observance will be immediately reported to the Fund. ### Continuous Performance Criterion: CBSL Purchases of Government Securities in the Primary Market - A continuous ceiling of zero applies to new purchases of government securities by the CBSL in the primary market. - Adjustment: The ceiling will be adjusted upward by the amount of shortfalls in foreign program financing of the central government (measured against programmed amounts as set out in Table 2). This adjustor applies only during six months after the Board date of the First review. Foreign currency amounts will be converted to Sri Lankan rupees using the program exchange rates defined in paragraph 9. ### Other Continuous Performance Criteria (Capital and External Account Restrictions) - During the program period, Sri Lanka will not: - a) impose or intensify restrictions on the making of payments and transfers for current international transactions; - b) introduce or modify multiple currency practices (MCPs); - c) conclude bilateral payment agreements that are inconsistent with Article VIII of IMF Articles of Agreement; - d) impose or intensify import restrictions for balance of payments purposes. ### Monetary Policy Consultation Clause (Inflation Bands and Triggered Consultations) - Inflation target bands around the projected 12-month rate of inflation in consumer prices as measured by the Colombo Consumer Price Index (CCPI, 2021=100) are specified in Table 1 attached to the MEFP. - Year-on-year inflation for each test date is measured using: - { CCPI*(t) – CCPI*(t-12) } / CCPI*(t-12) - CCPI*(t) = { CCPI(t-2) + CCPI(t-1) + CCPI(t) } / 3 - CCPI*(t-12) = { CCPI(t-14) + CCPI(t-13) + CCPI(t-12) } / 3 - If observed year-on-year inflation for the test date falls outside the outer bands in Table 1, the authorities will complete a consultation with the IMF Executive Board focusing on: (i) the stance of monetary policy and program consistency; (ii) reasons for deviation; and (iii) proposed policy response. - When such a consultation is triggered, access to Fund resources would be interrupted until consultation and the relevant program review are completed. - If inflation falls outside the inner bands in Table 1, the authorities will consult with IMF staff on reasons and proposed policy response. ### Indicative Targets: Social Safety Net (SSN) Spending - SSN spending comprises central government spending on: - (1) Aswesuma cash transfers; - (2) assistance to the elderly (over 70 years of age); - (3) allowance for disabled people; - (4) financial support for kidney patients; - (5) support under the empowerment program. - Classifications align with reporting in the Ministry of Finance Annual Report (Table 9). ### Indicative Target: Cost of Non-Commercial Obligations (NCOs) for Fuel and Electricity (Net of Government Transfers) - NCOs for fuel and electricity refer to CPC and CEB obligations to supply below cost-recovery prices. - The indicative target is the cost of fuel and electricity NCOs net of government transfers (the cost not compensated by central government budget). - Measurement of fuel NCOs 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) for CPC fuel supplies to transport, power generation, aviation, industries, kerosene and LPG, and agrochemicals. - If revenues (net of taxes) exceed cost of sales, fuel NCO cost is zero. - Government transfers to cover fuel NCOs measured as central government current transfers disbursed to CPC. - Measurement of electricity NCOs: - Starting January 1, 2024: 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 statement managed by CEB. If sales revenues exceed expenditures, electricity NCO cost is zero. - Until January 1, 2024: measured by total losses as reported on CEB’s financial statement. - Government transfers to cover electricity NCOs measured as central government transfers disbursed (including capital injection as specified in paragraph 6) to CEB. - For program monitoring, cost of fuel and electricity NCOs net of government transfers is calculated with time-lagged composites: - For the test date of end-March 2025: NCO(2024Q4) – G(2025Q1) - For the test date of end-June 2025: { NCO(2024Q4) + NCO(2025Q1) } – { G(2025Q1) + G(2025Q2) } - For the test date of end-September 2025: { NCO(2024Q4) + NCO(2025Q1) + NCO(2025Q2) } – { G(2025Q1) + G(2025Q2) + G(2025Q3) } - For the test date of end-December 2025: { NCO(2024Q4) + NCO(2025Q1) + NCO(2025Q2) + NCO(2025Q3) } – { G(2025Q1) + G(2025Q2) + G(2025Q3) + G(2025Q4) } - Definitions: - NCO(q) = NCO_fuel(q) + NCO_electricity(q) - G(q) = G_fuel(q) + G_electricity(q) ### Indicative Targets: Treasury Guarantees and Foreign Exchange Treasury Guarantees - Treasury guarantees: outstanding debt guarantees issued by the central government; exclude letters of comfort. - Outstanding guarantees = drawn amounts of guaranteed debts (different from issued guarantees which include undisbursed amounts). - Include outstanding guarantees published in the Statement of Contingent Liabilities in the Ministry of Finance Annual Report. - Rupee values for guarantees issued in other currencies will be calculated using the exchange rate for the last day of the calendar year as in the Statement of Contingent Liabilities. - Foreign exchange treasury guarantees: same definitions applied to guarantees issued in foreign currency; Rupee conversions use the calendar-year-end exchange rate as in the Statement of Contingent Liabilities. ### Data Reporting Requirements and Timing - Sri Lanka will provide the Fund, through reports at intervals or dates requested by the Fund, with requested information for monitoring progress under the MEFP and Letters of Intent. - All program monitoring data will be provided by the Ministry of Finance and the CBSL. - Specific reporting formats required for monitoring: - Fiscal performance and expenditure arrears: Tables 3, 4, and 5. - NCG targets: Table 6. - External sector performance: Tables 7 and 8. - Social safety net spending: Table 9 (quarterly). - Financial performance of CEB, CPC, and Sri Lankan Airlines: Tables 10, 11, and 12 (quarterly). - BSTA weekly operation statements of the CEB: no later than eight days after end of each week. - Cost of fuel NCO (net of government transfers): Table 13 (quarterly). - Treasury guarantees: Table 14 (quarterly). - Multiple Currency Practices assessment: data on official exchange rate action and impact on rates as requested. - Timing requirements for data submission: - Fiscal targets (Tables 3–5): within no more than five weeks after the end of each month, except salaries and wages, goods and services, subsidies and transfers (and subcomponents) within no more than seven weeks after the end of each month. Total recurrent expenditure and interest payments furnished within no more than five weeks. - Monetary targets (Table 6): within no more than four weeks after the end of each month. - External targets (Tables 7–8): within no more than 25 days after the end of each month. - Social safety net spending (Table 9): within no more than two months after the end of each quarter. - SOE financials (Tables 10–12): within no more than 2 months after the end of each quarter. - Cost of fuel NCO (Table 13): within no more than 5 weeks after the end of each quarter. - Treasury guarantees (Table 14): within no more than two months after the end of each quarter. ### Financial Sector Monitoring (Bank-by-Bank, Frequency) - Quarterly written update plus the following on a bank-by-bank basis: - Liquidity monitoring template, with breakdown by currency (daily) - LCR template, with breakdown by currency (monthly) - Net open foreign currency positions (weekly) - Exposures to the central government and large SOEs (CEB, CPC, SLA, RDA), with breakdown by entity, currency, and instrument (monthly) - Maturities of exposures to the central government and large SOEs (CEB, CPC, SLA, RDA) (monthly) - Arrears of state-owned banks (monthly) - Impairment schedule including breakdown of impairments on public sector exposures (monthly) - Monthly supervisory returns to CBSL including statements of financial position and comprehensive income (monthly) - Top 10 largest depositors (quarterly) - Large exposures exceeding 15 percent of capital (quarterly) - Capital adequacy template (quarterly) - Financial soundness indicators (quarterly) - Daily financial sector data will be provided within one week of the end of the reporting period; weekly data within two weeks; monthly data within four weeks; quarterly data within six weeks. *Source: 1lkaea2025001-print-pdf - 11. If (i) the amount of foreign program financing (exclusive of EFF disbursements) by the* ### 3. Net foreign financing ### 3. Net foreign financing ### Components of net foreign financing - International Sovereign Bonds 2/ - Official project loans - Official program loans ### Domestic financing (as presented) - 1. Domestic financing in local currency - 2. Domestic financing in foreign currency - T-bills 1/ - T-bonds 1/ - Loans - Deposits and overdrafts at banks - CBSL advances and deposits - Other (specify) - 1/ including net purchases by non-residents - 2/ including net purchases by residents - 3/ A negative sign means an increase in the TSA and vice versa. ### Change in Treasury Single Account - 4. Change in Treasury Single Account 3/ ### Official and private external financing instruments - Official trade credit - Syndicated loans - Other (specify) ### Privatization and total financing - 5. Privatization receipts - Total financing (1+2+3+4+5) ### Tables and related fiscal data (as listed) - Table 5. Sri Lanka: Unpaid Bills and Arrears 1/ (In millions of rupees) - Recurrent - Capital - Total - o.w. more than 3 months: - Recurrent - Capital - Total - 1/ as agreed for the purpose of monitoring the program - Table 6. Sri Lanka: CBSL’s Balance Sheet 1/ (In millions of rupees) - Table 7. Sri Lanka: Foreign Exchange Cashflows of the Central Bank and the Government 1/ (In millions of U.S. dollars) ### Foreign exchange cashflow items (Table 7) - 1. Total inflows, without swaps - Loans (public sector) - Program loans (budget support) - Project loans and grants - SLDBs - FCBUs - Commerical loans - Syndicated loans - Sovereign bonds - Other inflows - Interest receipts, forex trading profits, capital gains - Change in balances in DST account - o/w proceeds from public assets - 2. Total outflows, without swaps - Public sector debt service - Public sector amortization (excl. to IMF) - Official loans - multilateral creditors - India credit lines - other loans - SLDBs - FCBU loans - Syndicated loans - Settlement of ISBs - Public sector interest payment (incl. to IMF) - Interest to IMF - Interest to external creditors - Interest on domestic FX debt (SLDB, FCBU, etc) - 3. Net FX purchases from market - Outright purchases of FX from commercial banks - Outright sales of FX to commercial banks *Source: 3. Net foreign financing (from the provided IMF PDF content).* ### 4. Swaps with domestic commercial banks ### 4. Swaps with domestic commercial banks ### OMO FX swap transactions and reserve position - OMO FX swap transactions—inflows and outflows are tracked in the gross official reserve position tables (no numeric table values provided in this content excerpt). - Net inflows (incl. swaps = 1-2+3+4) at current rates and Net inflows (excl. swaps = 1-2+3) at current rates are monitored as program indicators. - Net International Reserves and Gross International Reserves are reported at market rates and at program rates (specific table values not included in the excerpt). - International swaps with foreign central banks include inflows and outflows and are subject to valuation changes. - Changes in Reserve Related Liabilities are monitored, including: - Change in ACU liabilities - Change in liabilities to IMF - existing debt service (amortization) - new purchases - Changes in CBSL other liabilities - Footnote: 1/ As agreed for the purpose of monitoring the program. ### Program implementation status and prior actions - All three prior actions (PAs) under the program have been met: - Elimination of all remaining import restrictions met on January 31, 2025. - Submission to parliament of amendments to the Value Added Tax (VAT) Act and Inland Revenue Act and issuing relevant gazette notifications to introduce revenue measures to underpin revenue mobilization in 2025 met on February 21, 2025. - Presentation by the Minister of Finance to parliament of the 2025 annual budget document, the Appropriation Bill and the Budget Speech (second reading) in line with program parameters met on February 17, 2025. - A narrowly scoped proposed VAT exemption for imported packaging materials was not included in the draft VAT Act amendments; authorities committed not to proceed with the proposed exemption. - A technical deviation: parliament approved in January 2025 a tax exemption to a private investor for a textile manufacturing zone originally authorized to offer tax concessions; authorities consider forgone tax revenue de minimis and reaffirm commitment not to approve new projects under the SDP Act until transparent, rules-based criteria are established (Structural Benchmark for end-August 2025). ### Macroeconomic outcomes and projections - The program has completed half of its 48-month Extended Fund Facility (EFF) arrangement. - Economic growth: - Estimated 4.5% in 2024, compared to 2% projected during the Second Review. - Authorities project growth of 5% in 2025. - Real contraction of 7.3% in 2022 referenced as the crisis trough. - International reserves: increased to US$6.1 billion by end-January 2025, providing about four months of import coverage. - Inflation: - Declined from 70% in September 2022 to 4% by August 2023. - Turned negative in late 2024 due to temporary factors. - Projected to return to 5% in late 2025. - Fiscal targets and outcomes: - Government revenue targeted at 15% of GDP in 2025 (noted as the highest in 15 years), up from an estimated 13.4% of GDP in 2024. - Primary balance surplus projected at 2.3% of GDP in 2025; historical series: 0.6% in 2023 and estimated 2.2% of GDP in 2024 (program basis). - Primary spending projected at 12.8% of GDP in 2025. - Overall fiscal deficit improved from 10.2% of GDP in 2022 to an estimated 6.8% of GDP in 2024 (6.1% for program purpose). ### Revenue mobilization and fiscal structural reforms - Revenue measures aim to raise tax revenues to 13.9% of GDP in 2025 through: - increased withholding taxes on interest income - taxes on service exports - higher taxes on certain industries - VAT on digital services - Offsetting measures include personal income tax reliefs and VAT exemptions on locally manufactured liquid milk and yoghurt. - Tax administration/compliance measures and timelines: - VAT compliance improvement program by May 2025. - Repeal of the simplified VAT system by September 2025. - Risk profiling of the largest 100 High Wealth Individual (HWI) taxpayers completed. - IT Strategic Plan and a property database to modernize the Inland Revenue Department (IRD) in a medium-term strategy. - PFM and SOE-related commitments: - Full implementation of the new PFM law by end-2025. - Update and publish the fiscal strategy statement (FSS) with a Fiscal Risks Statement and a medium-term PFM Reform Strategy and Action Plan by June 2025. - SOEs to publish audited financial statements by June 2025. - Drafting of an SOE law with World Bank assistance to align with the PFM Act. ### Social Safety Net (SSN) and protection of vulnerable groups - Social safety net (Aswesuma) and related measures: - Second-round of Aswesuma applications expected to complete by mid-2025. - Aswesuma coverage expected to be 1.6 million households by end-2025. - Payments for poor, extremely poor, elderly, disabled, and chronic kidney patients set to increase starting January and April 2025, raising the SSN spending floor by end-2025. - Empowerment Program financed by World Bank and ADB to provide livelihood support to help beneficiaries graduate from Aswesuma. - Note: Technical onboarding difficulties delayed social spending targets in 2024; authorities mobilized village-level officers to expedite beneficiary support and bank account openings. ### Debt restructuring, debt management, and transparency - Domestic Debt Optimization completed and agreements reached with major creditors including OCC and China EXIM Bank. - Bond exchange with private creditors in December 2024 achieved 98% participation. - Debt treatment with China Development Bank (CDB) completed in line with program parameters and comparability of treatment (COT). - Public Debt Management Office (PDMO) established under the PDM Act; to be fully operational by December 2025; guidelines and regulations to be issued by March 2025. - A medium-term debt strategy (MTDS) and annual borrowing plan (ABP) will be developed and published alongside the 2026 Budget. - Ministry of Finance has been publishing a quarterly report on public debt and debt service since February 2023, with scope broadening to include liabilities and contingent liabilities of budgetary central government and extra-budgetary units. ### Monetary policy, price stability, and Central Bank actions - CBSL stance and actions: - Eliminated monetary financing and used proactive, data-driven monetary policy to manage the 2022/23 high inflation episode. - Maintained an accommodative monetary policy stance throughout 2024. - Introduced a single policy interest rate in November 2024 to improve transmission. - Committed to a 5% inflation target, monitored through the Monetary Policy Consultation Clause (MPCC). - Will consult with IMF staff ahead of each Monetary Policy Board meeting. - CBSL balance sheet and capital: - Impact of Domestic Debt Optimization recorded on the balance sheet following IFRS practices. - CBSL’s equity returned to positive levels and is expected to strengthen further. - Price and exchange rate risks: - Inflationary pressures to be monitored from wage increases, demand recovery, relaxation of import restrictions, and exchange-rate passthrough. - CBSL prepared to take measures if inflation deviates from target. ### Financial sector resilience and supervision - Banking sector developments (2024): - Banking sector capital funds grew by 15.7%. - Regulatory capital (capital base) grew by 6.9%. - Total banking sector assets grew by 8.7%. - Gross loans and receivables grew by 4.1%. - Policy actions and reforms: - Ending suspension of Parate executions to help resolve non-performing loans (NPLs). - Enhanced financial sector supervision and crisis management with ADB and World Bank support. - Submission of amended Finance Business Act by September 2025. - State-owned banks (SOBs): framework adopted in May 2024 for a majority of independent directors and transparent nomination; CBSL issued directions for SOB independence and corporate governance directions in September 2024. ### Governance, anti-corruption, and institutional reforms - Governance and anti-corruption priorities and timelines: - Government Action Plan on governance reforms (end-February 2025 SB) is on track. - Strategic plan of the anti-corruption commission (CIABOC) (end-October 2024 SB) to be published in March 2025 following new director general appointment in January 2025. - CIABOC’s annual budget submitted based on the new strategic plan, allocating almost double the previous year’s resources. - Asset Recovery Law to be enacted by end-April 2025. - Tax Crimes Investigation unit to be established by end-February 2025. - Public Procurement law targeted by end-June 2025. - Amendments to the Strategic Development Projects (SDP) and Port City Acts to introduce transparent criteria for tax incentives. - AML/CFT and corporate law reforms: - Align Companies Act with FATF standards. - Enhance the AML/CFT regime and implement risk-based AML/CFT supervision of financial institutions. ### Medium-term growth agenda - Growth and structural priorities include: - Enhancing the social safety net and diversifying the economy. - Promoting exports, improving the investment climate, modernizing agriculture, adopting green economy policies, fostering innovation and digitalization, and supporting entrepreneurship and startups. - Encouraging Public-Private Partnerships (PPPs) and enhancing digital public infrastructure. - A Rescue, Rehabilitation, and Insolvency Bill to support efficient capital allocation by banks. - Plans to rationalize para-tariffs, implement a National Export Strategy, expedite Free Trade Agreements, and expand renewable energy generation (solar and wind) with private and multilateral financing. *Source: 1lkaea2025001-print-pdf - 4. Swaps with domestic commercial banks* ### CONCLUSION ### CONCLUSION ### Commitment to macroeconomic stability and debt sustainability - The Sri Lankan authorities remain steadfast in their commitment to achieving "long-term macroeconomic stability and sustainable public debt levels", aiming to "avoid repeated Fund assistance". - They express an "unwavering dedication to achieving satisfactory program performance". ### Policy stance and reform approach - The authorities view the "2022 economic and debt crisis" as an opportunity to implement "long-awaited reforms". - They "express gratitude to the creditor community and appreciate the support from the Fund and other partners". ### Program monitoring and implementation - Authorities "monitor the progress of deliverables under the EFF on a weekly basis, alongside staff", allowing for "timely corrective measures and contingency planning when needed". ### Requests and acknowledgements - The authorities "appreciate the support of Executive Directors for the completion of the Third Review under the EFF arrangement". *Source: 1lkaea2025001-print-pdf - CONCLUSION* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1lkaea2025001-print-pdf.pdf_