## 1lkaea2025002-print-pdf — EXECUTIVE SUMMARY ## Source details **Canonical URL:** [1lkaea2025002-print-pdf — EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2025/english/1lkaea2025002-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1lkaea2025002-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1lkaea2025002-print-pdf.pdf.json) --- ### Program status and modalities - IMF Executive Board approved in March 2023 a 48-month arrangement under the Extended Fund Facility in the amount of SDR2.286 billion (395 percent of quota or about US$3 billion). - On completion of the Fourth Review, Sri Lanka would have access to an additional SDR254 million (about US$347 million), bringing total purchases to SDR1.27 billion (about US$1.74 billion). - New and modified quantitative targets and structural benchmarks until June 2026 are proposed. - Staff recommends that the Board completes the required financing assurances review. - Program financing (2022–27) totals 25,557 (millions of US dollars). - IMF EFF contributions: 0 (2022), 678 (2023), 337 (2024), 1009 (2025), 679 (2026), 340 (2027); total 3,042. - IFI program financing support: 0 (2022), 1,120 (2023), 696 (2024), 725 (2025), 638 (2026), 630 (2027); total 3,809. - World Bank*: 0 (2022), 570 (2023), 258 (2024), 305 (2025), 258 (2026), 250 (2027); total 1,641. - ADB*: 0 (2022), 550 (2023), 438 (2024), 370 (2025), 380 (2026), 380 (2027); total 2,118. - Debt moratorium (external arrears accumulation): 2,834 (2022), 3,772 (2023), 644 (2024), 0 (2025–2027); total 7,250. - Debt relief: 0 (2022), 0 (2023), 2,740 (2024), 3,208 (2025), 1,982 (2026), 2,026 (2027); total 9,956. - Sovereign bonds (market access): 0 until 2027 when 1,500 is listed; total 1,500. - Memorandum: Gross International Reserves: 1,898 (2022), 4,392 (2023), 6,122 (2024), 7,255 (2025), 9,273 (2026), 12,974 (2027). ### Recent macro developments and activity - Real GDP growth and activity: - Economy grew by 5 percent y/y in 2024; Q1 2025 real GDP growth: 4.8 percent y/y. - Staff’s baseline growth projection: 3.5 percent y/y for 2025 (revised up from 3 percent y/y in the Third Review). - Sectoral drivers: manufacturing, construction, tourism; manufacturing growth in Q1-2025 noted at 9.6 percent y/y and construction 10.7 percent y/y. - Inflation and prices: - May headline inflation: -0.7 percent y/y; May core inflation: 1.2 percent y/y. - Deflation since September 2024; Q2 2025 headline inflation: -1.1 percent y/y (Supplement). - CBSL lowered the policy rate by 25 bps in May to 7.75 percent. - CBSL inflation target: 5 percent. - External sector and reserves: - 2025Q1 current account remained in surplus; net FX purchases of US$599 million; gross official reserves reached US$6.2 billion (52 percent of the ARA metric) at end-April. - Memorandum projections: Gross official reserves (end of period, US$ millions): 2024 Est. 6,122; 2025 Proj. 7,056; 2026 Proj. 7,255; 2027 Proj. 9,303. - REER depreciated by 4.6 percent y/y as of April; nominal exchange rate relatively unchanged y/y in May after a 2.6 percent year-to-date depreciation. - Financial sector and credit: - Credit growth reached 12.8 percent y/y in February. - Aggregate regulatory capital above 18 percent for the last 3 quarters of 2024; all banks meet capital requirements. - Net NPLs declined from 7.4 percent in 2024Q2 to 5.6 percent in 2024Q4 (Executive Summary); other series report gross NPLs at 12.1 percent in Q4 2024 (Banking sector table). - Fiscal and revenues: - Tax revenues in January–April reached 4.2 percent of GDP (21 percent y/y growth), driven by VAT and external trade taxes. - Primary balance registered a 1.6 percent of GDP surplus in the transitory budget outturn. - Key fiscal program targets for 2025 (QPC): primary surplus target of 2.3 percent of GDP; tax revenue target of 13.9 percent of GDP. ### Program performance and conditionality - Compliance summary: - All end-March 2025 quantitative criteria were met, except the indicative target on the stock of expenditure arrears. - By end-May 2025, all structural benchmarks were either met or implemented with delay. - Corrections to reported arrears led to upward revision: arrears stood at Rs138 billion as of end-March 2025. - Authorities committed to clearing identified arrears by the end of the program (March 2027); 2025 Budget includes provisions for arrears clearance. - Structural benchmarks and prior actions: - Prior actions on restoring cost-recovery electricity pricing and operationalizing automatic electricity tariff adjustment were met. - All SBs due since the Third Review to end-May were met or implemented with delay. - Specific SBs and timelines include: SDP Act amendments (end-August 2025), Port City Act amendments (end-October 2025), Customs legislation to mandate clearance for SEZs (end-October 2025), and amendments to PUCSL Act to mandate publication/quarterly reports (new SB). - Technical Memorandum (TMU) and monitoring: - TMU defines quantitative performance criteria and indicative targets including central government primary balance, tax revenue, new expenditure arrears, NIR, CBSL net credit to government (NCG), continuous QPCs on new external payment arrears and CBSL primary purchases, IT on SSN spending, and IT on NCOs for fuel and electricity. ### Electricity pricing, CEB financials, and fiscal risks - January 2025 electricity tariff reduction of 20 percent (PUCSL decision) led to Rs18 billion (0.05 percent of GDP) CEB operating losses in 2025Q1, covered by bank overdrafts and arrears to suppliers, creating contingent fiscal risks. - Cost-recovery pricing restored in June for remainder of 2025 with a 15 percent average tariff increase (prior action). - Estimated sufficient to bring CEB’s remaining 2025 operating balance to at least zero and cover scheduled repayments of CEB legacy debt. - Authorities committed to reviewing the tariff methodology by end-November 2025 (new SB). - BSTA guideline amended in June to remove the clause that prevented automatic 10 percent tariff adjustment when triggered (prior action); automatic adjustments expected to be restored after a grace period. - Continuous program commitments: maintain cost-recovery fuel pricing and quarterly formula-based tariff adjustments. ### Revenue-based fiscal consolidation and tax administration reforms - Key revenue measures and risks: - Motor vehicle import taxes: high-frequency data show steady growth in motor vehicle imports after removal of import restrictions on February 1; around US$675 million in letters of credit opened with corresponding tax collection at 0.5 percent of GDP by June 10. - Around 80 percent of 2025 revenue gains depend on this single measure; authorities committed to contingency measures if underperformance emerges. - Yield reductions/delays: withholding tax increase yields lowered; VAT on digital services delayed due to court challenges. - VAT and IRD actions: - Repeal of SVAT targeted by end-September 2025 conditional on a fully functional VAT refund system. - VAT compliance improvement program published by end-May 2025 (SB); expected compliance gains of 0.1 percent of GDP in 2025 and a similar amount in 2026. - IRD to report monthly project plan and fortnightly dashboard to MOF; software updates for VAT refunds ready by end-August 2025; simulation exercise results to be reported by mid-July 2025. - Property taxation: - SPRR finalization delayed; SB expected met with delay by end-September 2025; final database of market property values by mid-2026; property taxation enactment targeted by 2027H1. ### Restoring and maintaining debt sustainability - Debt restructuring status: - Out of US$28 billion of external debt under the restructuring perimeter at end-2023, only US$0.8 billion remain requiring restructuring agreements. - Bilateral agreements signed with Japan, India, and France; Saudi Arabia and Kuwait reached Agreements in Principle consistent with program parameters. - Processes expected to conclude in 2025. - Macro-Linked Bond (MLB) effects: - Projected average dollar GDP in 2025-27 is US$98.7 billion compared to first upper MLB threshold of US$94.0 billion. - Triggering the first MLB threshold leads to 25-75 basis-point higher coupon rates and 13 percent higher principal on restructured Eurobonds. - Despite higher debt service, improved macro conditions more than offset increases; all DSA targets remain respected. - DSA headline metrics and projections (selected exact figures): - Projected debt-to-GDP ratio at end-2032 improved from 90.3 percent to 88.3 percent (DSA target: 95 percent). - Average GFN to GDP ratio in 2027-32 declined from 12.73 to 12.66 (DSA target: 13 percent). - Public debt (percent of GDP) projections: Prel. 2024: 105.7; 2024: 110.0; 2025: 107.7; 2026: 103.8; 2027: 101.2; 2028: 97.9; 2029: 94.7; 2030: 91.6; 2031: 88.5; 2032: 85.5. - Gross financing needs (GFN, percent of GDP): 2024: 22.6; 2025: 19.6; 2026: 14.9; 2027: 14.0; 2028: 11.7; 2029: 11.3; 2030: 11.7. - Public Debt Management Office (PDMO): - PDMO established in December 2024; fully operationalization targeted by end-December 2025. - Parliament repealed the Foreign Loans Act on May 23, 2025 (SB) to consolidate debt management under PDMO. - PDMO to publish MTDS and annual borrowing plan with 2026 Budget. ### Outlook, downside scenarios, and program risks - Baseline projections: - Growth path (Table 1 snapshots): Real GDP growth: 2024 Est. 4.5; 2025 Proj. 5.0; 2026 Proj. 3.0; 2027 Proj. 3.5. - Inflation (average, Colombo CPI): 2024 Est. 1.2; 2025 Proj. 1.2; 2026 Proj. 3.8; 2027 Proj. 3.3. - End-of-period inflation: 2024 Est. -1.5; 2025 Proj. -1.5; 2026 Proj. 7.8; 2027 Proj. 8.9. - Downside scenarios: - Reinstatement of a 44 percent reciprocal tariff on exports to the US and lower tariffs on competitor countries could erode competitiveness. - Exports could decline by as much as 3 percentage points of GDP due to lower external demand and diversion of trade. - With spillovers, real GDP could decline by ¼ to 1½ percent relative to the baseline. - Unemployment would surge; public pressure could slow reform implementation and increase program underperformance risk. - Program financing and implementation risks: - Risks increased due to global trade policy uncertainty and tighter global financing conditions. - If downside risks materialize: reserve accumulation would slow, external financing gaps may emerge, remittances and tourism could fall, fiscal revenues would weaken, spending pressures would rise, and debt sustainability could deteriorate. - Staff assesses enterprise risks of proceeding with the Fourth Review, upon completion of prior actions on cost-recovery electricity pricing, are lower than delaying. ### Financial sector stability and supervisory reforms - Insolvency and credit recovery: - Parate executions reinstated in December 2024. - Rescue, Rehabilitation and Insolvency Bill on track for enactment by end-2025. - CBSL modernizing risk-based supervision and introducing ILAAP requirements for systemically important banks with IMF TA. - State-owned banks (SOBs): - Framework adopted to ensure SOB boards and management are merit-based and independent; MOF to conclude board selections by July 2025 (new SB). - Banking sector indicators (selected exact figures): - Regulatory capital to risk weighted assets: Q4 2022 16.2; Q4 2023 18.4; Q4 2024 18.4. - Gross nonperforming loans to total gross loans: Q4 2022 11.6; Q4 2023 12.8; Q4 2024 12.1. - Provision coverage ratio (total): Q4 2022 45.2; Q4 2023 49.0; Q4 2024 54.1. ### Governance, anti-corruption, procurement, and exemptions framework - Governance and anti-corruption measures: - CIABOC published lists of senior officials who did not file asset declarations in 2024 and guidelines for 2025 declarations including beneficial ownership requirement. - Asset Recovery Law (Proceeds of Crime Act) enacted on April 8, 2025 (SB). - Amendments to the Companies Act to align beneficial ownership framework with FATF standards cleared by cabinet and Attorney General; finalization targeted end-June 2025. - Procurement and public contracting: - Operationalized National Procurement Commission and adopted action plan; commit to enact Public Procurement Law by July 2025. - Roll-out of e-procurement pilot in September 2025 and full roll-out by end-December 2025. - Strengthening exemptions and Port City / SDP Acts: - Authorities reaffirm program commitment to refrain from granting tax exemptions until new frameworks are enacted. - Between January and September 2024, exemptions issued to 24 companies under current Port City Act without IMF consultation; four advanced applications will be approved given legal/reputational exposure. - Amend SDP Act by end-August 2025 (SB) and Port City Act by end-October 2025 (new SB) to introduce transparent, rules-based, time-bound incentives and to limit duration. - Customs legislation to give Customs Department mandate over clearance to/from SEZs to lower revenue leakages (end-October 2025, new SB). - Authorities to provide monthly data on firms receiving new exemptions two weeks after the end of each month. - Tax expenditure transparency: - Publish improved annual tax expenditure statement by November 2025. ### Social safety nets and targeted support - Social spending: - IT on social spending for end-March 2025 met. - Measures: increased Aswesuma cash transfers, extended payments for select groups, expedited expansion of social registry, Rs. 2.9 billion in stationery allowances for underprivileged children in January–June 2025. - Aswesuma: retroactive cash transfers Rs. 3.4 billion to first-round beneficiaries by June 2025; enumeration of close to 813,000 second-round applicants to be completed by June 2025 (93 percent completed as of end-May); recertification of 3.4 million first-round applicants planned. - Empowerment pilots: World Bank and ADB targeting 22,000 beneficiaries with expected disbursement of Rs. 2.6 billion in 2025; National empowerment program Rs.1.5 billion allocated in 2025 expected to support 1.2 million beneficiaries over 3 years. - National Social Protection Strategy envisaged in August 2025. ### Monitoring, data reporting, and TMU specifics - TMU monitoring and adjustors: - Program NIR floor is adjusted for deviations in foreign program financing, net borrowings, external commercial loans, project loan disbursements, and proceeds from commercialization of public assets. - Specific program test date assumptions for 2025 (in million US$ cumulative): foreign program financing: 188 (Mar), 288 (Jun), 573 (Sep), 725 (Dec); amortization of external debt (excl. IMF): 370 (Mar), 741 (Jun), 1,111 (Sep), 1,435 (Dec); interest payments on external debt (excl. IMF): 290 (Mar), 580 (Jun), 870 (Sep), 1,189 (Dec); project loans/grants disbursed: 175 (Mar), 350 (Jun), 525 (Sep), 700 (Dec). - Adjustor cap: project loans and grants disbursed capped at US$250 million in 2024 and 2025, and at $125 million for Jan–Jun 2026; other adjustors uncapped. - Reporting timetables (selected): - Fiscal targets: within no more than five weeks after month-end (with some components within seven weeks). - Monetary targets: within no more than four weeks after month-end. - External targets: within no more than 25 days after month-end. - SSN spending: within no more than two months after quarter-end. - SOE financials: within no more than 2 months after quarter-end. - BSTA weekly statements: provided no later than seven days after week-end. - Financial sector daily/weekly/monthly/quarterly templates: specified frequencies and delivery windows. ### Staff appraisal and policy recommendations (key imperatives) - Core recommendations: - Restore and maintain electricity cost recovery permanently and review electricity pricing governance in consultation with IMF and development partners. - Amend tax exemptions frameworks (SDP Act and Port City Act) to be rules-based and commensurate with economic value; refrain from granting exemptions until frameworks enacted. - Sustain revenue-based fiscal consolidation and complete comprehensive reforms, including strengthening PFM, improving tax administration, and reducing corruption vulnerabilities. - Clearly communicate fiscal and debt constraints to foster political acceptance and pre-empt reform fatigue. - Target social support to promote inclusive growth within limited fiscal space. - Continue prudent monetary and financial sector policies, greater exchange rate flexibility, and refrain from monetary financing. - Preserve a well-capitalized banking sector, resolve NPLs, and gradually phase out BOP restrictions to rebuild buffers and resilience. - Advance structural reforms: trade facilitation (National Single Window), free trade agreements, infrastructure, labor reforms to boost female labor participation, PPP legislation, FDI liberalization, e-land titling, and climate resilience measures. ### Risks, contingency planning, and mission engagement - Major identified risks and policy responses: - Trade policy and investment shocks (High likelihood; High impact): allow exchange rate adjustment, diversify external financing, consider tighter fiscal stance. - Waning reform momentum on revenue mobilization (High likelihood; High impact): enforce corrective actions, frontload revenue mobilization, frequent engagement. - Inflation upside risks (Medium likelihood; Medium impact): tighten monetary policy if needed. - Social unrest (Medium likelihood; Medium impact): implement inclusive reforms, strengthen communication. - Enterprise risk assessment: - Enterprise risks declined to moderate; capacity to repay assessed adequate but subject to significant risks; Fund credit outstanding would peak at 3.1 percent of GDP in 2027 (14.1 percent of exports of goods and services; 24.4 percent of gross reserves). - Mission engagement: - Missions met authorities in Colombo (April 3–11) and Washington, DC (April 22–25, 2025) and included E. Papageorgiou (Mission Chief) and multi-department staff and local economists. *Source: EXECUTIVE SUMMARY and selected sections (1lkaea2025002-print-pdf).* ### EXECUTIVE SUMMARY ### 1lkaea2025002-print-pdf - EXECUTIVE SUMMARY ### Context - The economic outlook remains positive, and the government has reaffirmed its commitment to the program. - Reforms continue to deliver on objectives including enhancing social protection and advancing governance reforms. - Global trade policy uncertainty has increased downside risks to Sri Lanka’s macroeconomic and social stability. - The government holds a two-thirds majority in parliament and controls a majority of local councils following the May elections and intends to accelerate reforms including reducing corruption, reforming tax exemptions frameworks, retooling fiscal revenue administration, and adopting measures to help the vulnerable. - The United States accounted for about 23 percent of total goods exports (3 percent of GDP) in 2024; garment and rubber industries employ over 1 million people directly and indirectly. ### Program Status and Modalities - IMF Executive Board approved in March 2023 a 48-month arrangement under the Extended Fund Facility in the amount of SDR2.286 billion (395 percent of quota or about US$3 billion). - On completion of the Fourth Review, Sri Lanka would have access to an additional SDR254 million (about US$347 million), bringing total purchases to SDR1.27 billion (about US$1.74 billion). - New and modified quantitative targets and structural benchmarks until June 2026 are proposed. - Staff recommends that the Board completes the required financing assurances review. ### Recent Developments - Growth and activity - The economy grew by 5 percent y/y in 2024, driven by manufacturing, construction and tourism sectors. - High-frequency indicators in 2025Q1 suggest growth momentum will persist; PMIs for manufacturing and services remain in expansion. - Tourist arrivals have reached pre-pandemic levels. - Inflation and prices - May headline inflation: -0.7 percent y/y. - May core inflation: 1.2 percent y/y. - Deflation largely due to declines in utilities and transportation reflecting electricity tariff cuts in January and lower global fuel prices. - External sector and reserves - 2025Q1 current account remained in surplus, supported by tourism and remittances. - Net FX purchases of US$599 million; gross official reserves reached US$6.2 billion (52 percent of the ARA metric) at end-April. - Nominal exchange rate relatively unchanged y/y in May after depreciating by 2.6 percent year-to-date. - Real Effective Exchange Rate (REER) depreciated by 4.6 percent y/y as of April. - Fiscal and revenues - Tax revenues in January-April reached 4.2 percent of GDP (21 percent y/y growth), driven by VAT and external trade taxes. - Primary balance registered a 1.6 percent of GDP surplus, with low capital expenditures due to limited spending provisions in the transitory budget arrangement. - Financial sector and credit - Credit growth reached 12.8 percent y/y in February. - Aggregate regulatory capital above 18 percent for the last 3 quarters of 2024; all banks meet capital requirements. - Net NPLs declined from 7.4 percent in 2024Q2 to 5.6 percent in 2024Q4, supported by higher provisions. ### Outlook and Risks - Baseline projections - Staff’s baseline incorporates the 10 percent baseline tariff rate on goods exports to the US on an ongoing basis. - Growth in 2025 is revised up to 3.5 percent y/y (relative to 3 percent y/y in the Third Review). - Average inflation in 2025 revised down to 3.3 percent y/y. - Current account projected to remain relatively buoyant driven by tourism and remittances; deterioration only marginal as higher trade deficit is largely offset by stronger tourism and remittance inflows. - Downside scenarios and impacts - Reinstatement of a 44 percent reciprocal tariff on exports to the US and lower tariffs on competitor countries would erode competitiveness. - Exports could decline by as much as 3 percentage points of GDP due to lower external demand and diversion of trade. - With spillovers, real GDP could decline by ¼ to 1½ percent relative to the baseline. - Unemployment would surge; public pressure could slow reform implementation and increase program underperformance risk. - Program financing and implementation risks - Risks to program financing increased due to global trade policy uncertainty and tighter global financing conditions. - Risks to program implementation remain high given possibility of reform fatigue. - If downside risks materialize: reserve accumulation would slow, external financing gaps may emerge, remittances and tourism could fall, fiscal revenues would weaken, spending pressures would rise, and debt sustainability could deteriorate. - Authorities commit to work closely with staff to assess impacts and formulate policy responses within program contours, including appropriate monetary policy easing and well-targeted fiscal support. ### Program Performance - Overall assessment - Program performance is generally strong with some implementation risks being addressed. - All end-March 2025 quantitative criteria were met, except the indicative target on the stock of expenditure arrears. - By end-May 2025, all structural benchmarks were either met or implemented with delay. - End-March headline inflation remained below the lower outer band of the Monetary Policy Consultation Clause largely due to energy prices. - Prior actions on restoring cost-recovery electricity pricing and operationalizing automatic electricity tariff adjustment were met. - Fiscal targets and arrears - Fiscal ITs on the primary balance, tax revenue, government guarantees, and social spending were met. - IT on the stock of expenditure arrears was not met. - Corrections to reported arrears: the authorities reported outstanding liabilities for certain interest subsidy schemes and other liabilities identified in published Auditor General audit reports that were not previously reported to the Fund. - These corrections led to an upward shift in the stock of arrears and changed assessment of end-December 2023 and end-December 2024 quantitative performance criterion (QPC) on the ceiling of the stock of arrears as not met, resulting in noncomplying purchases. - The bulk of the arrears were accumulated before the EFF program. - Arrears stood at Rs138 billion as of end-March 2025. - Authorities are committed to clearing the identified arrears by the end of the program (March 2027) while meeting the primary balance target; the 2025 Budget includes provisions for arrears clearance and authorities will consult with staff on an arrears clearance strategy. - Monetary policy and reserves - ITs on CBSL’s primary market purchases of government securities and net credit to government (NCG) are being met given elimination of monetary financing. - Net international reserves (NIR) outperformed the target. - Headline inflation in 2025Q1 fell below the outer band of the Monetary Policy Consultation Clause (MPCC). - Electricity pricing and fiscal risks - The 20 percent electricity tariff reduction in January changed the assessment of the continuous structural benchmark on cost-recovery electricity pricing to not met. - The tariff reduction has led to significant operating losses by the electricity company. - Implementation of two prior actions on restoring and safeguarding cost-recovery electricity pricing will help contain fiscal risks. ### Governance, Implementation, and Mission Engagement - Authorities met with mission during April 3-11, in Colombo, and April 22-25, 2025, in Washington, DC, including President and Finance Minister Dissanayake, Prime Minister Amarasuriya, Central Bank Governor Weerasinghe, and other senior officials, Parliamentary Opposition, business community, civil society, and international partners. - Mission team members included E. Papageorgiou (Mission Chief), S. Dhungana, D. Prihardini, U. Wiriadinata (all APD), S. Kwalingana (SPR), D. Rozhkov (FAD), D. Palermo (MCM), M. Woldemichael (resident representative), and M. Abeyawickrama (local economist). S. Panth (APD Deputy Director) and P. Breuer (previous Mission Chief) attended parts of the mission. P. Harischandra (OED) participated in key policy meetings. R. Yang and S. Abebe (APD) assisted in report preparation. *Source: EXECUTIVE SUMMARY (1lkaea2025002-print-pdf).* ### 8. All SBs due since the Third Review to end-May were met or implemented with delay ### 8. All SBs due since the Third Review to end-May were met or implemented with delay ### Compliance with Structural Benchmarks (SBs) and prior actions - Fiscal: - The 2025 Budget approved in March is in line with program parameters. - Quarterly Key Performance Indicators (KPIs) on tax compliance due at end-February were implemented with delay; the same SB due at end-May was met. - The SB on completing and publishing the VAT compliance improvement program (end-May) was met. - The continuous SB on cost-recovery electricity pricing is now met with the PA implementation. - Financial: - Parliament reinstated out-of-court collateral enforcement procedures for banks (Parate executions) ahead of time. - The repeal of the Foreign Loans Act was implemented with delay due to the parliamentary break in April. - Governance: - MOF published an updated governance action plan (MEFP ¶33). - CIABOC published its new strategic plan and submitted to MOF a budget consistent with the plan (end-October 2024 SB). - The government enacted a comprehensive Asset Recovery Law (MEFP ¶34). ### A. Revenue-Based Fiscal Consolidation and Fiscal Structural Reforms — key findings and measures - Fiscal targets and composition: - Primary surplus target of 2.3 percent of GDP (QPC) in 2025. - Tax revenue target of 13.9 percent of GDP (QPC) in 2025. - Changes relative to Third Review: - Revenue yields from increasing the withholding tax on interest income have been lowered. - Introduction of VAT on the supply of digital services has been delayed due to court-related challenges. - Expected offsets from stronger VAT compliance and trade taxes based on Q1 overperformance. - Motor vehicle import taxes concentration risk: - High-frequency data show steady growth in motor vehicle imports after removal of import restrictions on February 1. - Around US$675 million in letters of credit opened and corresponding tax collection at 0.5 percent of GDP by June 10. - Around 80 percent of 2025 revenue gains depend on this single measure; authorities committed to contingency measures if underperformance emerges. - SVAT repeal and VAT refund system: - Authorities accelerated project management and finalization of the risk-based exporter refund system. - SB on reporting results of the simulation exercise to test new refund process (end-June) expected met with a short delay in mid-July. - Authorities committed to providing significant human resources to IRD to ensure timely SVAT repeal (SB, end-September) and smooth post-repeal VAT refund functioning. - Initial VAT compliance improvement program (SB, end-May) completed; execution expected to ensure compliance gains in 2026. - Electricity pricing and CEB fiscal risks: - PUCSL approved a 20 percent electricity tariff cut in January 2025 despite CEB proposing unchanged tariff; resulted in Rs18 billion (0.05 percent of GDP) operating losses of CEB in 2025Q1. - Losses covered by bank overdrafts and arrears to suppliers, creating contingent fiscal risks. - Foregoing scheduled tariff revision in April and automatic tariff adjustment based on the Bulk Supply Transaction Account (BSTA) exacerbated the situation. - Cost-recovery pricing restored in June for remainder of 2025 with a 15 percent average tariff increase (PA). - This increase is estimated sufficient to bring CEB’s remaining 2025 operating balance to at least zero and cover scheduled repayments of CEB legacy debt. - CEB’s financial performance in Q2 will be assessed; worse-than-expected outturn may require another tariff increase in October. - Authorities committed to reviewing the tariff methodology by end-November 2025 in consultation with IMF staff (new SB), and, if needed, revising it. - Cost-recovery fuel pricing continues to be maintained. - Automatic electricity tariff adjustment and BSTA: - Disagreements between CEB and PUCSL prevented BSTA from triggering an automatic 10 percent tariff adjustment when BSTA threshold was reached in March. - BSTA guidelines amended in June, eliminating the clause that caused disagreements on the BSTA value (PA). - Following a grace period after the June tariff revision, automatic tariff adjustments between quarterly revisions should be restored. - Authorities will amend the PUCSL Act to mandate submission to parliament and publication of quarterly reports on maintaining cost-recovery electricity pricing (new SB). - Property taxation and databases: - Delays in resolving data sharing constraints have set back finalization of the Sales Price and Rents Register (SPRR); SB expected met with delay by end-September. - Authorities should resolve data sharing problems, complete SPRR, and prepare a final database of market property values by mid-2026. - Property taxation enactment targeted by 2027H1; concurrent discussions on modalities are vital. - Public Financial Management (PFM) and SOEs: - Authorities will adopt implementing regulations of the PFM Act by end-December 2025 (new SB). - Upcoming PPP, SOE, and public asset management bills should be consistent with the PFM Act and best practices. - New strategy on Sri Lankan Airlines should restore operational viability and resolve legacy debts. - Stronger efforts needed to ensure annual publication of audited financial statements of 52 major SOEs by end-June. - Capital spending execution: - Capital spending budget under-executed by 1.1 percent of GDP on average in 2023-24. - Weaknesses in project appraisal, monitoring and evaluation due to lack of a unified database contributed to under-execution. - Authorities should utilize IMF TA on the Public Investment Management Appraisal (PIMA) update to develop strategic plans and improve public investment execution and efficiency. - Social spending and safety nets: - Authorities met the end-March 2025 IT on social spending after intensifying efforts to strengthen adequacy, coverage, and targeting of the social safety net (SSN). - Measures included increasing Aswesuma cash transfers, extending payment periods for selected groups, expedited expansion of the social registry, providing school stationery support for vulnerable children, and enhanced budget allocation for the empowerment program. - Onboarding of remaining first-round Aswesuma applicants expected to be completed by June; enumeration of second-round applicants expected by end-June with payments commencing same month. - Authorities plan to recertify all first-round Aswesuma applicants and review Aswesuma design including eligibility criteria. - National Social Protection Strategy envisaged in August 2025 to serve as high-level roadmap for implementing and financing SSN programs. - Arrears and procurement controls: - MOF to use ITMIS to produce monthly report on size, maturity, and composition of arrears by June 2026 (new SB). - Measures include preparing a credible budget with realistic revenue projections and working towards ITMIS-based commitment control. - From June 2026 onward, only a system-generated purchase order should be accepted for supplying goods and services. - Senior citizen subsidy scheme: - Reforms required to limit fiscal costs; authorities will institute identity verification for new interest subsidy scheme to limit abuse (MEFP ¶11). - The scheme will be discontinued after end-December 2025. ### B. Restoring and Maintaining Debt Sustainability — findings and actions - Debt restructuring status: - Out of US$28 billion of external debt under the restructuring perimeter at end-2023, only US$0.8 billion remain for which restructuring agreements need to be reached. - Draft bilateral agreements being discussed with all official creditor committee members and other official creditors. - Agreements with Japan and India were signed; authorities engaged in good faith negotiations with remaining commercial creditors. - All processes expected to conclude in 2025. - Macro-Linked Bond (MLB) impact and DSA: - The first MLB threshold is now expected to be triggered due to the stronger rupee that leads to a higher dollar GDP. - Projected average dollar GDP in 2025-27 is now US$98.7 billion compared to the first upper MLB threshold of US$94.0 billion. - This leads to higher coupon rates, by 25-75 basis points depending on bond series, and 13 percent higher principal on the restructured Eurobonds. - Improved macroeconomic conditions more than offset the increase in debt service, resulting in improved debt indicators. - All DSA targets remain respected. - Debt sustainability risks remain high in the next years; critical to fully complete debt restructuring and continue fiscal discipline. - Public Debt Management Office (PDMO): - PDMO established in December 2024 with IMF TA support; authorities on track to fully operationalize it. - New PDMO staff training with CBSL underway; necessary infrastructure being set up. - Parliament repealed the Foreign Loans Act (SB) to consolidate debt management under PDMO. - PDMO will update medium-term debt strategy and prepare annual borrowing plan to be published with the 2026 Budget, consistent with the PFM law. - Recommendation: - Staff recommends completing the financing assurances review, given progress in Sri Lanka’s nearly complete debt restructuring. ### C. Price Stability and External Sustainability — key macro policy points - Inflation and monetary policy: - Inflation expected to return to target gradually by 2025H2. - Deflation since September 2024. - CBSL lowered the policy rate by 25 bps in May to 7.75 percent to support inflation expectations and bring inflation towards the 5 percent target. - Forward real rates close to neutral rate estimates; Taylor rule models imply little room for easing given supply-side nature behind deflation. - If global shocks materialize, monetary policy should ease appropriately. - Monetary policy governed by the MPCC. - Reserves and external measures: - CBSL committed to rebuilding reserves (QPC) through outright purchases, allowing greater exchange rate flexibility, and phasing out administrative BOP measures. - CBSL FX sales remain limited to prevent disorderly market conditions. - Authorities committed to phasing out remaining exchange restrictions, multiple currency practices (MCPs), and capital flow management measures (CFMs) as BOP stabilizes. ### D. Financial Sector Stability — measures and governance - Credit and insolvency: - Parate executions reinstated in December 2024. - CBSL directive encouraging banks to provide incentives for SMEs to renegotiate overdue debts. - Corporate insolvency bill to reform bankruptcy framework and facilitate credit recovery on track to be enacted by end-2025. - Supervision and liquidity: - CBSL modernizing risk-based supervision with focus on aligning liquidity framework to Basel standards. - With IMF TA, CBSL plans to introduce ILAAP requirements to systemically important banks to better manage and monitor liquidity. - State-owned banks (SOBs) governance: - Appointment of independent executive board members paused after presidential election; several boards incomplete and committees not functioning. - Government committed to appointing independent board members by end-July, consistent with SOB governance framework (new SB). ### E. Strengthening Governance and Reducing Corruption Vulnerabilities — reforms and initiatives - Asset declarations and CIABOC: - CIABOC published list of senior officials who did not file an asset declaration in 2024 and guidelines for the 2025 declaration clarifying beneficial ownership requirement (MEFP ¶34). - Land titling and transparency: - Establishing an e-land registry and titling would enhance transparency, reduce corruption opportunities, and clarify property rights (MEFP ¶40). - Procurement reform: - Adopting electronic government procurement (e-GP) to improve spending efficiency, lower corruption risks, and enhance competition by opening opportunities for SMEs. - Drafting of the Public Procurement Law in line with international best practices progressing with support of development partners (MEFP ¶37). - AML/CFT and beneficial ownership: - Amendments to the Companies Act to ensure the beneficial ownership framework is consistent with FATF standards have been approved by cabinet and cleared by the Attorney General; authorities committed to progress on AML/CFT reforms (MEFP ¶39). - Judicial conduct and professionalization: - Judicial Services Commission materials (circulars and provisions) will be collated for ease of reference and reviewed to identify areas to enhance (MEFP ¶34). *Source: 1lkaea2025002-print-pdf - 8. All SBs due since the Third Review to end-May were met or implemented with delay; canonical URL: https://www.imf.org/-/media/files/publications/cr/2025/english/1lkaea2025002-print-pdf.pdf* ### 30. Strengthening the exemptions framework of SDP Act, Port City Act, and Customs is ### 30. Strengthening the exemptions framework of SDP Act, Port City Act, and Customs is ### Strengthening exemptions framework and customs mandate - Efforts are underway to amend the SDP Act (end-August, SB) and Port City Act (end-October, new SB), in consultation with IMF staff, to introduce transparent, rules-based, best-practice aligned eligibility criteria for time-bound incentives. - To lower customs revenue leakages, the authorities will prepare and submit legislation to Parliament to ensure the Customs Department has a mandate for the clearance of goods to and from special economic zones (SEZs) (end-October 2025, new SB). ### Reaffirmed commitments and recent deviations - Authorities reaffirmed program commitment to refrain from granting tax exemptions until new frameworks are in place. - Between January and September 2024, the authorities issued exemptions to 24 companies under the current Port City Act without consulting IMF staff, despite commitments to consult. - There are currently four applications at an advanced stage awaiting approval for which land lease and advance payments have already been made (MEFP and Annex II). Considering legal and reputational risks, the authorities will approve these projects. - Authorities pledged to refrain from granting any new Port City-related exemptions until the amended Port City Act and its regulations are enacted in line with IMF TA, supported by a new continuous SB and a commitment to provide monthly information on recently provided tax exemptions (MEFP, ¶35). ### Raising potential growth — priority structural reforms - Exports are low (as a share of GDP) and less diversified compared to peers; FDI to Sri Lanka is significantly lower across time. - Priority reforms include: - (i) implementing trade facilitation reforms, including the National Single Window, establishing free trade agreements, and gradually reducing para-tariffs; - (ii) improving priority public infrastructure; - (iii) expediting labor reforms to reduce rigidities and enhance female labor force participation; - (iv) promoting effective PPP legislation; - (v) streamlining and liberalizing the FDI regulatory framework. - Trade facilitation status: as of end-2024, Sri Lanka ranked 98 out of 127 developing and least developed countries in implementing WTO Trade Facilitation Agreement reforms. - Definition note: The National Single Window is a single digital entry point for traders to submit documentation and data requirements for importation, exportation, or transit of goods. ### Program modalities, conditionality, and data issues - Proposed modifications: replace the QPC on the stock of arrears with a periodic QPC on new arrears; update the TMU on arrears accordingly. - QPC on NIR for end-December 2025 is proposed to be modified to reflect updated debt service and financing assurances information. - IT on SSN for end-September 2025 is proposed to be modified to reflect a longer review process for new beneficiaries, unchanged for end-December 2025 as cash payments will reflect delayed benefits. - New quantitative program conditionality is proposed through June 2026. - A waiver of applicability is requested because data for end-June QPCs will not be available by the time of the Board meeting in early July; program performance appears on track. ### Financing and key program figures - The program is fully financed with firm financing commitments in place for the next 12 months and good prospects for adequate financing for the remainder of the program. - Program financing (2022–27) totals 25,557 (millions of US dollars). - IMF EFF contributions shown: 0 (2022), 678 (2023), 337 (2024), 1009 (2025), 679 (2026), 340 (2027); total 3,042. - IFI program financing support shown: 0 (2022), 1,120 (2023), 696 (2024), 725 (2025), 638 (2026), 630 (2027); total 3,809. - World Bank* shown: 0 (2022), 570 (2023), 258 (2024), 305 (2025), 258 (2026), 250 (2027); total 1,641. - ADB* shown: 0 (2022), 550 (2023), 438 (2024), 370 (2025), 380 (2026), 380 (2027); total 2,118. - Debt moratorium: external arrears accumulation reported as 2,834 (2022), 3,772 (2023), 644 (2024), 0 (2025–2027); total 7,250. - Debt relief shown: 0 (2022), 0 (2023), 2,740 (2024), 3,208 (2025), 1,982 (2026), 2,026 (2027); total 9,956. - Sovereign bonds (market access) shown: 0 until 2027 when 1,500 is listed; total 1,500. - Memorandum: Gross International Reserves shown as 1,898 (2022), 4,392 (2023), 6,122 (2024), 7,255 (2025), 9,273 (2026), 12,974 (2027). ### Risks, capacity to repay, and safeguards - Enterprise risks assessed at moderate level (Annex IV): financial risks moderate and mitigated by generally strong program implementation; business risks mitigated by program conditionalities and coordination with external partners; reputational and credibility risks to the Fund are moderate. - Staff assesses enterprise risks of proceeding with the Fourth Review, upon completion of prior actions on cost-recovery electricity pricing (MEFP Table 2), are lower than that of delaying. - Capacity to repay remains adequate but subject to significant risks and contingent on successful implementation of program measures and the debt restructuring (see Annex III ¶6). - Under the program, Fund credit outstanding would peak at 3.1 percent of GDP in 2027, or 14.1 percent of exports of goods and services, and 24.4 percent of gross reserves. - EFF repurchases and charges would peak in 2031, at 2.2 percent of goods and services exports and 3.6 percent of gross reserves. - Safeguards Assessment: CBSL equity returned to positive levels (LKR308 billion at end-2024) and is expected to continue recovering gradually; CBSL will continue balance sheet quarterly stress tests and implement remaining recommendations from the February 2023 safeguards assessment. ### Staff appraisal and policy recommendations - Reforms and policy adjustments are bearing fruit: economy rebounding strongly, inflation expected to return to target, reserves improved, currency stabilized, revenue-based fiscal consolidation outperformed, SSN enhanced substantially, cost-recovery electricity pricing restored for remainder of 2025, fuel cost recovery preserved, fiscal and governance reforms improved public finance management and reduced corruption vulnerabilities, debt restructuring nearly complete. - Key policy imperatives and recommendations: - Restore and maintain electricity cost recovery permanently and review governance of electricity pricing, including consultation with the IMF and development partners. - Amend previous tax exemptions frameworks to be commensurate to the economic value they provide; avoid unchecked and overly generous tax exemptions. - Sustain revenue-based fiscal consolidation and complete comprehensive reforms, including reducing corruption vulnerabilities. - Clearly communicate fiscal and debt constraints to foster political acceptance and pre-empt reform fatigue. - Target social support to promote inclusive growth amid limited fiscal space. - Continue prudent monetary and financial sector policies, greater exchange rate flexibility, and refrain from monetary financing. - Preserve a well-capitalized banking sector, resolve NPLs, and gradually phase out BOP restrictions to rebuild buffers and resilience. - Advance structural reforms to liberalize trade, improve the investment climate, enhance SOE efficiency, and mitigate climate vulnerabilities to unlock growth potential. *Source: 1lkaea2025002-print-pdf - 30. Strengthening the exemptions framework of SDP Act, Port City Act, and Customs is* ### 45. Based on Sri Lanka’s generally strong performance and commitments under the program, ### Based on Sri Lanka’s generally strong performance and commitments under the program, ### Program decisions and staff support - Staff supports the authorities’ requests for: - (i) the completion of the financing assurances review, - (ii) the modification of performance criteria, - (iii) waiver of applicability of performance criteria, - (iv) the completion of the Fourth Review. - Staff supports the authorities’ request for temporary approval of existing exchange restrictions and MCPs, as the approval criteria are met. - Note: These restrictions are imposed for BOP reasons, are non-discriminatory, and temporary in nature. ### Real sector: 2024–2025 developments and outlook - Strong economic rebound spanned across sectors in 2024 with significant capital investment and household consumption recovery. - High frequency indicators suggest a positive outlook; tourist arrivals reached pre-pandemic levels in 2025Q1. - Both exports and imports continue to recover but trade deficit remains substantial. - Deflationary pressures persist largely due to the electricity tariff cut, lower commodity prices, and base effects. - Key projection snapshots (Table 1): - Real GDP growth: 2024 Est. 4.5; 2025 Proj. 5.0; 2026 Proj. 3.0; 2027 Proj. 3.5. - Inflation (average, Colombo CPI): 2024 Est. 1.2; 2025 Proj. 1.2; 2026 Proj. 3.8; 2027 Proj. 3.3. - Inflation (end-of-period): 2024 Est. -1.5; 2025 Proj. -1.5; 2026 Proj. 7.8; 2027 Proj. 8.9. ### Fiscal sector: consolidation, revenues, and debt - Fiscal deficits have declined since 2022, resulting in lower GFNs although public debt remains high. - Tax collections improved significantly driven by VAT reforms and higher fuel excises in 2024. - Primary expenditure has been consolidated and interest payments have started to decline. - Key public finance figures (Table 1, percent of GDP unless noted): - Revenue and grants: 2024 Est. 13.7; 2025 Proj. 13.7; 2026 Proj. 15.1. - Total expenditure: 2024 Est. 19.3; 2025 Proj. 19.3; 2026 Proj. 20.4. - Primary balance: 2024 Est. 2.2; 2025 Proj. 2.2; 2026 Proj. 2.3. - Central government gross financing needs: 2024 Est. 22.1; 2025 Proj. 21.9; 2026 Proj. 22.8. - Central government debt: 2024 Est. 99.5 (percent of GDP); 2025 Proj. 100.5; 2026 Proj. 105.7. - Public debt: 2024 Est. 104.6; 2025 Proj. 105.2; 2026 Proj. 110.7. - Central government operations (Table 2a, in billions of rupees): - Total revenue and grants: 2024 Act. 4,094; 2025 Draft budget 4,091; 2026 Third Review Proj. 4,990. - Total expenditure and net lending: 2024 Act. 5,776; 2025 Draft budget 5,776; 2026 Third Review Proj. 7,190. - Overall balance (program definition): 2024 Act. -1,682; 2025 Draft budget -1,686; 2026 Third Review Proj. -2,200. - Central government debt (nominal): 2024 Act. 29,743; 2025 Draft budget 30,054; 2026 Third Review Proj. 34,164. - Stock of Expenditure Arrears: 2024 Act. 95; 2025 Act. 56; 2026 Third Review Proj. 28. ### Foreign exchange, external sector, and markets - The rupee has remained relatively stable in nominal and real terms in 2025Q1. - GIR and NIR continue to accumulate in line with program objective. - Domestic government bond yields have declined close to pre-crisis levels. - Sovereign spreads normalized following the successful Eurobond exchange, though recent volatility and uptick occurred due to global uncertainty. - Foreign holdings of government securities have been recovering amid improved market sentiment. - Equity market has rebounded yet remains volatile. - Balance of Payments and reserves (Table 4a / Table 4b highlights): - Current account balance (US$ millions): 2024 Est. 1,746; 2025 Proj. -409; 2026 Proj. -48; 2027 Proj. -538. - Current account balance (percent of GDP): 2024 Est. 1.8; 2025 Proj. -0.4; 2026 Proj. 0.0; 2027 Proj. -0.6. - Gross official reserves (end of period, US$ millions): 2024 Est. 6,122; 2025 Proj. 7,056; 2026 Proj. 7,255; 2027 Proj. 9,303. - GIR in months of prospective imports: 2024 Est. 2.9; 2025 Proj. 3.0; 2026 Proj. 3.2; 2027 Proj. 3.3. - GIR as percent of ARA composite metric: 2024 Est. 50.3; 2025 Proj. 50.5; 2026 Proj. 58.3; 2027 Proj. 60.3. - Usable GIR (US$ millions): 2024 Est. 4,686; 2025 Proj. 4,686; 2026 Proj. 7,056; 2027 Proj. 7,255. - External debt (public and private, US$ billions): 2024 Est. 53.9; 2025 Proj. 53.9; 2026 Proj. 54.9. - External debt as percent of GDP: 2024 Est. 54.4; 2025 Proj. 54.4; 2026 Proj. 56.1. ### Monetary and banking sector - Policy rate has normalized. - Reserve money growth remains contained as NFA growth from reserves accumulation is offset by NDA reduction. - Credit to private sector continues to recover but remains significantly below pre-crisis level. - Spread between bank lending and deposit rates has returned to pre-crisis level. - Banking sector profits have been gradually recovering and capital adequacy ratios continue to improve beyond regulatory requirements. - Monetary aggregates (Table 3, end-of-period, selected items in billions of rupees): - Central Bank net foreign assets: 2024 Act. 222; 2025 Proj. 688; 2026 Proj. 1,520; 2027 Proj. 2,761; 2028 Proj. 3,440. - Reserve Money: 2024 Act. 1,539; 2025 Proj. 1,640; 2026 Proj. 1,779; 2027 Proj. 1,928; 2028 Proj. 2,087. - Broad money: 2024 Act. 14,322; 2025 Proj. 15,255; 2026 Proj. 16,550; 2027 Proj. 17,935; 2028 Proj. 19,419. - Gross international reserves (US$ millions, memorandum): 2024 Act. 6,122; 2025 Proj. 7,255; 2026 Proj. 9,273; 2027 Proj. 12,974; 2028 Proj. 14,894. - Banking sector soundness (Table 7, selected quarterly indicators): - Regulatory capital to risk weighted assets: Q4 2022 16.2; Q4 2023 18.4; Q4 2024 18.4. - Gross nonperforming loans to total gross loans: Q4 2022 11.6; Q4 2023 12.8; Q4 2024 12.1. - Provision coverage ratio (total): Q4 2022 45.2; Q4 2023 49.0; Q4 2024 54.1. - Return on equity (after tax): Q4 2022 10.4; Q4 2023 11.5; Q4 2024 15.6. - Liquid assets to total assets: Q4 2022 18.5; Q4 2023 32.2; Q4 2024 38.6. - Deposits to total assets: Q4 2022 78.8; Q4 2023 81.5; Q4 2024 81.0. ### External financing, debt composition, and IMF engagement - Composition of public debt (Table 5, selected points): - Total public debt (US$mn): 2024 reported total public debt 107,984 (100.0 percent total debt; percent of GDP figures presented in table). - External (foreign law) share: 37.3 percent of total debt. - Domestic (local law) share: 62.7 percent of total debt. - Central bank bilateral currency swaps (PBOC swap) noted: 1,406 (included in external). - Exchange rate (eop, Rupees/$): 293 (as reported). - Gross external financing needs and exceptional financing (Table 6, restructuring scenario, selected items): - Gross external financing needs (US$ millions): 2024 Act. -3,917; 2025 Proj. -6,709; 2026 Proj. -4,985; 2027 Proj. -4,625. - Exceptional financing and components include IMF EFF, IFI budget support, debt moratorium/external arrears accumulation, and debt relief as presented in the Table. - Projected payments to the Fund (Table 8, selected items): - Fund repurchases and charges (in millions of SDR): 2025 247.8; 2026 257.2; 2027 267.5; 2028 283.1. - Fund repurchases and charges (in millions of U.S. dollars): 2025 329.1; 2026 343.7; 2027 358.1; 2028 379.0. - Fund credit outstanding (in millions of SDR): 2025 1,875.4; 2026 2,234.7; 2027 2,348.8; 2028 2,188.6. - Reviews and purchases under the Four-Year Extended Arrangement (Table 9): - Availability schedule lists nine 254 million SDR disbursements (each 43.9 percent of quota) across approval and periodic review completion dates, totaling 2,286.0 million SDR (395.0 percent of quota). ### Summarized projections and risks (select) - Growth and inflation paths show normalization after 2025 with Real GDP growth projected at 3.1 percent annually from 2028–2030 (Table 1). - Public debt ratios peak in projection years (e.g., Public debt 110.7 percent of GDP in 2026) and decline gradually thereafter under the program projections. - Reserves metrics show accumulation to levels above ARA composite metric thresholds in projection years (e.g., GIR in percent of ARA 100.1 in 2028; 116.7 in 2030). *Source: Data provided by the Sri Lankan authorities; and IMF staff estimates.* ### Annex I. Sovereign Risk and Debt Sustainability Framework ### Annex I. Sovereign Risk and Debt Sustainability Framework ### DSA headline findings and compliance - Debt remains sustainable and debt indicators have improved relative to the Third Review, despite additional debt service from the Macro-Linked Bond (MLB) adjustment. - The first MLB threshold is expected to be triggered due to a stronger rupee leading to a higher dollar GDP. - All DSA targets remain respected: - Projected debt-to-GDP ratio at end-2032 improved from 90.3 percent to 88.3 percent (DSA target: 95 percent). - Average Gross Financing Needs (GFN) to GDP ratio in 2027-32 declined from 12.73 to 12.66 (DSA target: 13 percent). - The DSA update assumes full execution of the authorities' indicative and announced debt treatments based on the end-2023 outstanding debt stock and has been updated to reflect the actual end-2024 debt stock. - Public debt remains high, posing crowding out risks for private investment and broader debt-overhang risks for growth and the sovereign-bank nexus. ### DSA macroeconomic assumptions and MLB adjustment - Exchange rate assumptions: - Projected real exchange rate depreciation during the program period is reduced by some 4 percentage points to reflect more favorable exchange rate developments and relative stability after the lifting of motor vehicle restrictions in early 2025. - MLB/GDP threshold and implications: - Projected average dollar GDP in 2025-27 is US$98.7 billion compared to the first MLB threshold of US$94.0 billion. - Triggering the first MLB threshold leads to: - 25-75 basis-point higher coupon rates, depending on bond series. - 13 percent higher principal on the restructured International Sovereign Bonds (ISB). - Despite higher debt service, improved macroeconomic conditions offset the increase resulting in improved debt indicators. - Contribution of debt relief remains significant in closing the external financing gap. ### SCDI (state-contingent debt instruments) and risk quantification - Baseline now incorporates the first SCDI upper trigger. - Maximum additional payments from the SCDI relative to baseline: - Declined from US$242 million to US$111 million (equivalent to 0.23 and 0.10 percent of 2028 GDP, respectively) per year on average over 2028-32. - Although probability of triggering higher SCDI states is higher (as dollar GDP increased), debt sustainability targets remain respected. ### Key macro and fiscal projections (selected figures preserved exactly as in source) - Real growth (%) — Current vs. 3rd Review: - 2024: 5.0 (Current) vs. 4.5 (3rd Review) - 2025: 3.5 (Current) vs. 3.0 (3rd Review) - 2026–2029: 3.1 across both series (with small differences noted in earlier years) - GDP deflator inflation (yoy, %): - 2024: 3.8 (Current) vs. 3.5 (3rd Review) - 2025: 3.6 (Current) vs. 4.9 (3rd Review) - 2026–2029: 5.3/5.1/5.0/5.0 (Current) vs. 5.5/5.3/5.2/5.1 (3rd Review) - Primary balance (% of GDP): - 2024–2029: 2.2–2.3 (Current and 3rd Review largely identical) - Nominal GDP (Rs bln) — Current vs. 3rd Review: - 2024: 27,420 (Current) vs. 27,630 (3rd Review) - 2025: 29,899 (Current) vs. 29,893 (3rd Review) - 2026: 32,036 (Current) vs. 32,309 (3rd Review) - 2027: 34,754 (Current) vs. 35,123 (3rd Review) - 2028: 37,664 (Current) vs. 38,113 (3rd Review) - 2029: 40,779 (Current) vs. 41,343 (3rd Review) - 2030: 44,163 (Current) vs. 44,819 (3rd Review) ### Debt dynamics and projections (selected table excerpts preserved) - Public debt (percent of GDP) — Prel. 2024 and projections: - Prel. 2024: 105.7 - 2024: 110.0 - 2025: 107.7 - 2026: 103.8 - 2027: 101.2 - 2028: 97.9 - 2029: 94.7 - 2030: 91.6 - 2031: 88.5 - 2032: 85.5 - 2033–2035: 82.8 / 80.2 - Change in public debt (percent of GDP): - 2024: 4.3 - 2025: -2.3 - 2026: -3.8 - 2027: -2.6 - 2028: -3.3 - 2029: -3.2 - 2030: -3.1 - 2031: -3.1 - 2032: -3.0 - 2033: -2.7 - 2034: -2.7 - Gross financing needs (GFN, percent of GDP): - 2024: 22.6 - 2025: 19.6 - 2026: 14.9 - 2027: 14.0 - 2028: 11.7 - 2029: 11.3 - 2030: 11.7 - 2031: 12.3 - 2032: 13.1 - 2033: 12.8 - 2034: 12.9 - Debt service (percent of GDP): - 2024: 24.9 - 2025: 21.9 - 2026: 17.2 - 2027: 16.3 - 2028: 14.1 - 2029: 13.6 - 2030: 14.0 - 2031: 14.6 - 2032: 15.4 - 2033: 15.1 - 2034: 15.2 ### Realism, historical context, and scenario analysis - Staff commentary: - Public debt rose drastically in 2020-22 due to exchange rate depreciation and large fiscal deficits. - In 2024, debt restructuring, primary balance surplus, real exchange rate appreciation, and real growth contributed to debt-to-GDP decline. - Debt reduction over the longer term rests on continued fiscal discipline and adherence to the macroeconomic adjustment program. - Projection realism and risks: - Past forecasts have shown optimism for most debt drivers; domestic yields are presently high but expected to normalize under the program. - Growth recovery is expected to be slow due to sovereign default and associated balance sheet impacts. - Long-term and climate scenarios: - Historical-average scenario (assumes -2.1 percent primary balance deficit to GDP, 1.4 percent real GDP growth, and some real depreciation) leads to unsustainable debt. - Climate change adaptation scenario does not lead to large changes in debt indicators. - Climate change mitigation scenario (based on 5.7 percent of GDP per year over 10 years) leads to large changes in debt indicators. ### Risk diagnostics and medium-term indexes - Medium-term indicators and risk signals: - Fanchart width: 73.7 1.1 - Probability of debt not stabilizing (pct): 14.4 0.1 - Terminal debt level x institutions index: 59.8 1.3 - Average GFN in baseline: 13.9 4.7 - Bank claims on government (pct bank assets): 40.5 13.1 - Chg. in claims on govt. in stress (pct bank assets): 2.6 0.9 - GFN financeability index: ... 18.7 - Prob. of missed crisis, 2025-2030 (if stress not predicted): 54.5 pct. - Prob. of false alarm, 2025-2030 (if stress predicted): 3.4 pct. - Staff commentary: MT tools (run for 2026-31) point to high levels of risks associated with relatively high debt and GFNs, a strong sovereign-bank nexus, and vulnerability to large shocks. ### Policy recommendations and contingency responses (from Annex II: Risk Assessment Matrix) - Fiscal and program financing risks (High likelihood; High expected impact): - Possible policy responses: (i) higher IFI financing, (ii) broader and more frontloaded revenue mobilization measures, and (iii) appropriate program recalibrations if necessary. - Waning reform momentum on revenue mobilization (High likelihood; High expected impact): - Policy response: Enforce program slippages through corrective actions; streamline and prioritize reforms; continue frequent engagement through weekly meetings with authorities. - Inflation upside risks (Medium likelihood; Medium expected impact): - Policy response: Monitor inflation closely and tighten monetary policy if needed to keep inflation anchored. - Social unrest risks (Medium likelihood; Medium expected impact): - Policy response: Implement inclusive reforms including social security and anti-corruption reforms; strengthen communication to increase public understanding of program design and objectives. - External risks and responses: - Trade policy and investment shocks (High likelihood; High expected impact): Allow exchange rate adjustment, diversify external financing access, consider tighter fiscal stance to preserve debt sustainability. - Deepening geoeconomic fragmentation (High likelihood; Medium expected impact): Promote export and FDI strategies, support domestic suppliers, improve labor skills, and maintain agile monetary policy. - Regional conflicts (Medium likelihood; Medium expected impact): Support with easing monetary policy and targeted fiscal support; allow exchange rate adjustment and seek higher external financing access. - Commodity price volatility (Medium likelihood; Medium expected impact): Closely monitor inflation implications and maintain monetary policy agility. *Source: IMF staff estimates and projections (Annex I. Sovereign Risk and Debt Sustainability Framework; Annex II. Risk Assessment Matrix).* ### Annex III. Sri Lanka’s Enterprise Risk Assessment ### Annex III. Sri Lanka’s Enterprise Risk Assessment ### Overview - Relative to the beginning of the program, enterprise risks have declined to moderate levels. - Contributing factors to successful program execution to date include: close program monitoring, strong engagement with the authorities, and regular communication and outreach activities. - Enterprise risks identified in earlier reviews have declined as negotiations with creditors on the debt restructuring advanced and as uncertainty surrounding the 2024 elections subsided. - Regular engagement with external partners and Sri Lanka’s creditors ensures that program financing remains adequate through the remaining program period. - Assessment: The risks from discontinuing the lending program outweigh those from continuing with it. ### Financial risks: capacity to repay and debt sustainability - Financial risks stemming from Sri Lanka’s capacity to repay are assessed as moderate and are mitigated by strong program implementation. - Capacity to repay the Fund is assessed to be adequate under the program, but: - It is subject to significant risks. - It is contingent on the successful implementation of program measures and the remaining elements of the debt restructuring. - With good recent progress, risks from a protracted debt restructuring process are now no longer significant. - Even after implementation of a successful program and debt restructuring, debt sustainability risks will remain high for many years. - Factors mitigating the risk of arrears to the Fund include: - (i) regular financing assurances review (with every review) to ensure adequate assurances are in place including from key multilateral and official bilateral creditors; - (ii) close monitoring of remaining debt restructuring efforts; - (iii) targeted macro critical conditionality to ensure the fiscal consolidation remains on track and delivers adjustment consistent with debt sustainability. - These mitigants are balanced against the risks of Sri Lanka running arrears to the Fund—taking into account current credit outstanding—in the absence of a Fund arrangement. ### Business (program execution) risks - Program conditionality and coordination with external partners provide adequate assurances that business risks from a potential weakening of program implementation are adequately managed. - Risks: - Following the debt restructuring, program performance could weaken due to its only partial implementation on account of election pledges, posing member engagement risks. - Global uncertainty may lead to trade and investment disruptions that could lead to an underfinanced program. - Business risks are assessed as major but are being mitigated by: - (i) the ability to recalibrate conditionality at program reviews to evolving circumstances or possible shocks; - (ii) the authorities’ commitment to upfront implementation of reform measures and steadfast implementation of structural reforms supported by extensive capacity development. - Close coordination with external partners ensures: - the program is fully financed for the next 12 months; - there are good prospects for adequate financing for the rest of the program period. - Alternative risk: Not proceeding with the program review if it remains on track would entail significant business risks in the form of failing to provide timely and effective financial assistance and policy advice to Sri Lanka, which could jeopardize the recovery. ### Reputational and credibility risks - Reputational and credibility risks to the Fund are assessed as moderate and managed through adequate communication. - Risks described: - The new government, keen on delivering on election pledges, could seek to implement additional relief measures. - The Fund could face reputational risks (focused on Fund’s objectivity) if the public perceives policies under the program as too tight, weakening public support for the program. - Mitigants and communications strategy: - Continued close communication with the authorities, including weekly program monitoring meetings, close engagement through the Resident Representative, two Long-Term Experts in the field, regular program missions and frequent capacity development missions. - Regular communication with stakeholders with the support of COM helps secure support for the program. - The mission has established regular communication channels to engage on the need to sustain reform momentum and maintain the program on track to preserve gains from the past two years. - Risk of inaction: If the program remains on track, failure to proceed with the review would heighten reputational risks by creating a perception that the Fund is failing to support a member country and could worsen economic and financial conditions (for example, by impairing investor confidence). This could delay the restoration of Sri Lanka’s market access post-default and affect its capacity to repay the Fund. _Annex III. Sri Lanka’s Enterprise Risk Assessment_ ### Appendix I. Letter of Intent ### Appendix I. Letter of Intent (June 16, 2025) ### Program progress and macroeconomic context - Growth reached 5.0 percent in 2024. - Robust reserves build-up: gross international reserves reached US$6.2 billion at end-April 2025, covering about 52 percent of ARA metric. - Inflation has remained low and turned negative since September 2024. - All end-March 2025 indicative targets (ITs), except the stock of arrears, were met. - All structural benchmarks (SBs) due by end-May 2025 were met or implemented with delay. - Prior actions completed: restoring cost-recovery electricity tariff; amending the Bulk Supply Transaction Account (BSTA) guideline to reinstate BSTA-based automatic tariff adjustments. - Request to IMF Executive Board: - Approve completion of the Fourth Review under the EFF. - Approve disbursement of SDR 254 million (43.9 percent of quota) upon approval. - Grant waiver of applicability for end-June performance criteria (PCs) due to data unavailability at the time of the Board meeting. ### Program objectives and commitments - Principal objectives under the 48-month Extended Fund Facility (EFF): - Achieve revenue-based fiscal consolidation, with strong social safety nets, fiscal institutional reforms, and cost-recovery energy pricing. - Restore public debt sustainability through completed debt restructuring. - Maintain price stability and rebuild reserves under greater exchange rate flexibility. - Safeguard financial sector stability. - Advance structural reforms to address corruption vulnerabilities and enhance growth. - Commitment to consult with the Fund in advance on additional or revised measures and to provide timely and accurate data for program monitoring. - Continued program monitoring through semi-annual reviews, quantitative performance criteria, indicative targets, and structural benchmarks per the MEFP and TMU. ### Fiscal policy, revenue measures, and public financial management - 2025 Budget and fiscal stance: - Budget targets a primary surplus of 2.3 percent of GDP starting 2025 (QPC). - 2025 Appropriation Act aligned with program parameters (SB, end-March 2025). - Revenue targets and measures: - Revenue package expected to raise tax revenue to 13.9 percent of GDP in 2025 (QPC). - Expected large yield from relaxation of vehicle imports to be monitored in real time. - VAT Act amendment delays reduced expected yield from VAT on digital services. - Yield from the increase in withholding tax on interest income reduced due to new self-certification system. - Commitment: if any revenue measures underperform, adopt additional high-quality measures; any overperformance will be locked-in to reduce 2026 adjustment needs. - VAT system reforms and compliance: - Repeal of SVAT targeted by end-September 2025 (SB), conditional on a fully functional VAT refund system. - IRD actions: - Monthly project plan and fortnightly dashboard reporting to MOF initiated. - Report results of a simulation exercise by mid-July 2025 (SB, end-June 2025). - Software updates for VAT refund process ready by end-August 2025. - Ensure manageable number of exporters eligible for VAT refunds given IRD capacity. - Track and report Key Performance Indicators (KPIs) up to June 2026 (SB and Annex I). - VAT compliance improvement program: - Program published by end-May 2025 (SB). - Expected compliance gains of 0.1 percent of GDP in 2025 and a similar amount in 2026. - IRD mobilization from June 2025; field visits reinstated starting October; shift to traditional VAT regime by end-December 2025. - IRD modernization and enforcement: - Medium-term IRD Modernization Strategy and Implementation Plan in progress. - Steering Committee established. - RAMIS enhanced to administer individual income tax returns and Social Security Contribution Levy; processing tax collections through RAMIS only. - High Worth Individuals (HWI) Unit to institute intensive audits and checks. - Property tax groundwork: - Plan to introduce property taxes by 2027H1. - Digitize historical valuation records starting with municipal councils, to be completed by end-2025. - Establish final Sales Price and Rents Register (SPRR) by end-September 2025 (SB, end-June 2025). - Combine records to generate final database of properties with estimated market values by June 2026; make database accessible to IRD, valuation department, land registry, and public by September 2026. - Capital spending and PIMA: - Capital spending averaged 3 percent of GDP between 2022 and 2024, with under-execution of 1.1 percent of GDP in 2023-24. - Plan to update the 2018 Public Investment Management Assessment (PIMA) with IMF technical assistance and implement recommendations. - Senior citizens’ interest subsidy scheme: - Institute identity verification to prevent multiple subsidy payments. - Will not exceed 2025 budget appropriation for the scheme. - Ensure timely refunds to licensed banks; discontinue scheme for deposits placed after December 31st, 2025. - Arrears management and PFM improvements: - Stock of arrears estimated at around 0.6 percent of GDP as of end-June 2023, reduced to 0.4 percent of GDP since then. - Prioritize clearing expenditure arrears by 2027 via an arrears’ clearance strategy (verification, classification, prioritization, liquidation) while complying with spending ceiling and primary balance targets. - Commitment to not incur new domestic arrears. - Actions to improve arrears monitoring and PFM: - Reporting mechanisms for expenditure commitments, invoices, accounts payable, payments, and remaining arrears; functionality to be operationalized in ITMIS by June 2026 (new SB). - Improve cash management with accurate short-term cash flow estimates and budgetary provision for arrears clearance. - Strengthen system-based commitment controls. - Finalize roll-out and full implementation of ITMIS to manage and track budget execution timely. - PFM law implementation: - Adopt implementing regulations of the new PFM law by end-December 2025 (new SB). - Future Budget submissions starting from the 2026 Budget to include all documentation required by the PFM law. - Ensure future PFM-related bills are consistent with the PFM law. - Integrate PPPs with public investment management; MOF to play strong gatekeeper role. - Update and publish Fiscal Strategy Statement (FSS) and enhance with a Fiscal Risks Statement by end-June 2025. - Prepare and publish a medium-term PFM Reform Strategy and Action Plan by end-December 2025. - ITMIS rollout completed to 171 out of 172 spending heads by end-May 2025; final spending head by end-June 2025; plan to integrate ITMIS with e-procurement (e-GP). ### Debt restructuring, financial sector, and energy sector measures - Debt restructuring: - Comprehensive debt restructuring near completion after agreement with China Exim Bank in July 2024 and Eurobond exchange in December 2024. - Bilateral agreements signed with Japan and India; finalizing agreements with remaining Official Creditor Committee members. - All debt treatments consistent with program parameters and comparability of treatment principles; ongoing negotiations with other external private and remaining official bilateral creditors. - Financial sector: - Financial sector health has improved; capital buffers are increasing. - Commitment to preserve financial system stability. - Energy sector and electricity tariffs: - Cost-reflective electricity pricing restored for remainder of 2025 (prior action) to eliminate expected CEB operating losses in the rest of 2025 and allow scheduled repayments of CEB legacy debts. - Tariffs to be maintained at cost recovery level overall across consumer types with quarterly formula-based adjustments on a forward-looking basis (continuous SB). - Amending the Electricity Act is in final stages; tariff methodology review and possible revision by November 2025 (new SB). - BSTA guideline amended to remove clause requiring CEB to bring balance to zero through working capital financing and to ensure BSTA-based automatic tariff triggers (prior action). - Automatic tariff rule: BSTA triggers an automatic 10 percent increase of the tariff whenever CEB’s buffers reach the lower threshold two weeks in a row; PUCSL may audit BSTA submissions and take action. - Monitor CEB financial performance continuously; short-term debt increases will be restricted to avoid triggering automatic tariff increases. - Stand ready to use tariff surcharges between revisions to restore cost recovery if needed. - Dispatch audit of CEB operational costs delayed; expected finalization by end-August 2025. - Monthly retail fuel prices to remain at cost recovery (continuous SB). - Continued compliance with program IT related to on-budget transfers. *Source: Appendix I. Letter of Intent, Memorandum of Economic and Financial Policies (Attachment I) — June 16, 2025.* ### 15. We will improve the transparency of electricity tariff revisions and strengthen ### 15. We will improve the transparency of electricity tariff revisions and strengthen accountability of the regulator towards CEB’s finances. ### Electricity tariff transparency and regulator accountability - Amend the PUCSL Act to mandate PUCSL to submit to parliament quarterly reports on maintaining cost recovery electricity pricing and publish the reports (new SB). ### Structural reforms to improve financial viability of SOEs - CPC: - A small margin in the fuel pricing formula is utilized by CPC to repay US$251 million of the old financial obligations. - Of this amount, US$146 million remains to be repaid as of end-March 2025, and we will ensure that these repayments continue. - CEB: - Plan to settle CEB’s remaining legacy debt (incurred prior to 2023), estimated at about Rs. 180 billion as of end-2024. - Repayment of this debt is included in the electricity tariff calculation starting in June 2025. - SLA: - Finalizing a medium-term strategic plan for Sri Lankan Airlines (SLA) to restore operational viability and resolve legacy debts. ### SOE governance and financial transparency - Key actions: - (i) Clarify mandates of key SOEs through Statements of Corporate Intent and hold management accountable using key performance indicators. - (ii) Review framework for selecting SOE board members to ensure they are qualified and independent. - (iii) Ensure that all 52 major SOEs publish their audited financial statements by end-June of the following year. - Current status: - Published 2023 audited statements of 45 SOEs. - The remaining seven SOEs face delays related to clearing backlog of financial statements since 2020-22. - Legislative and institutional measures: - Drafting a new SOE law with assistance from the World Bank to incorporate transparency and governance requirements, including explicit policy on management of state financial assets and rigorous, transparent, merit-based appointments. - Ensure new law is consistent with the PFM Act and that the government has full authority to exercise financial oversight of SOEs. - Plan to enact the SOE law by end-2025. - Will consult with the IMF before submitting the SOE law to Parliament. ### Strengthening framework for SOE borrowing - Commitments: - New SOE borrowing limited to financing commercially viable activities. - Except for project loans on-lent by the Treasury and short-term trade financing, there will be no new borrowing in foreign currency (FX) for non-financial SOEs with less than 20 percent of revenues denominated in FX. - Guarantees on FX borrowing will remain allowed on an exceptional basis to facilitate IFI financing to SOEs under very strict conditions. ### Restoring and targeting social spending - Recent and planned payments: - Increased payments for the poor and extremely poor groups in January 2025, and for the elderly, disabled, and chronic kidney patients starting April 2025. - Extended benefit payment periods for transitional and vulnerable groups through end-April and end-December 2025, respectively. - Expect to disburse Rs. 2.9 billion in stationery allowances to children in underprivileged schools during January–June 2025. - Aswesuma program actions: - (i) Expedite onboarding of remaining first-round Aswesuma beneficiaries and retroactively pay associated cash transfers of Rs. 3.4 billion by June 2025. - (ii) Complete by June the enumeration of close to 813,000 second-round applicants (with 93 percent completed as of end-May) with payments expected to commence the same month. - (iii) Swiftly implement the grievance redress process for appeals and objections. - Welfare system improvements: - Revamping modules of the Integrated Welfare Management System (IWMS) with a view to launching recertification of 3.4 million first-round applicants later this year. - (i) Review the Aswesuma eligibility criteria and strengthen program design informed by nationally representative surveys. - (ii) Explore leveraging the social registry for beneficiary selection for other social assistance programs beyond Aswesuma. - Targeted programs and strategy: - Empowerment pilot program (World Bank and ADB) targeting 22,000 Aswesuma beneficiaries with expected disbursement of Rs. 2.6 billion in 2025 for skills training and livelihood grants. - National empowerment program with Rs.1.5 billion allocated in 2025, expected to support 1.2 million beneficiaries over 3 years. - Medium-term National Social Protection Strategy expected to be published in August 2025. ### Restoring public debt sustainability - Debt sustainability targets under the EFF program: - (i) Reduce public debt below 95 percent of GDP by 2032. - (ii) Reduce the central government’s annual gross financing needs below 13 percent of GDP, on average, in 2027-32. - (iii) Reduce the central government’s annual debt service in foreign currency below 4.5 percent of GDP in every year in 2027-32. - (iv) Close the balance of payments (BOP) financing gaps of US$17.1 billion over the EFF program period. - Debt restructuring progress: - Close to completing process with only US$0.8 billion remaining for which agreements have to be reached out of US$28 billion of outstanding external debt under the restructuring perimeter at end-2023. - Signed bilateral agreements with Japan and India; working to finalize remaining OCC bilateral agreements and reach agreements with remaining creditors with a view to conclude these processes in 2025. ### Public Debt Management Office (PDMO) - Operational and governance plans: - PDMO will be fully operational by end-December 2025. - Publish guidelines for PDMO operation and submit to Parliament regulations on on-lending and guarantee activities by end-June 2025. - PDMO will report and be accountable to the MOF but have significant operational autonomy. - PDMO responsibilities: - Formulate medium-term debt strategies (MTDS) and annual borrowing plans (ABP), both to be published with the 2026 Budget documentation. - Direct implementation of ABPs, including taking decisions on auction cut-offs. - Oversee all domestic and international market-based financing decisions and participate in evaluation of all debt, derivatives, and guarantees. - Fully repealed the Foreign Loans Act on May 23, 2025 (SB) to consolidate debt management functions in the PDMO. ### Price stability and monetary framework - Inflation target and monitoring: - Committed to a price stability mandate of 5 percent inflation target. - Continued monitoring through the Monetary Policy Consultation Clause (MPCC). - CBSL will remain prudent and carefully assess and calibrate policy stance to maintain inflation around the target. - Prohibitions on monetary financing: - In accordance with the Central Bank Act, CBSL will not provide monetary financing. - Discontinuation of monetary financing monitored by a QPC on the ceiling of the CBSL’s net credit to the government and a continuous QPC to ensure no purchases of Treasury securities from the primary market. - CBSL balance sheet and accounting: - CBSL will continue to regularly assess its balance sheet and ensure adequate levels of capital. - CBSL has followed best practices, consistent with the IFRS, in recording the impact of Domestic Debt Optimization on its financial positions. - Based on the financial statement for 2024, CBSL equity has returned to positive levels and is expected to continue improving gradually. ### Exchange rate policy and international reserves - Exchange rate flexibility: - Committed to exchange rate flexibility; since March 2023, allowed the rupee to move in line with fundamentals. - Limiting FX sale interventions to disorderly market conditions that could lead to destabilizing inflation and/or significant balance sheet effects. - Will transparently disclose interventions and ensure FX intervention is consistent with Net Official International Reserves (NIR) targets. - NIR accumulation targets and interventions: - Committed to net international reserves (NIR) target (QPC). - 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 and another US$1.3 billion in 2026H1. - Aim to save any overperformance in NIR accumulation and have a cap on the adjustor for NIR target in cases of shortfall in project financing. - Lifting administrative external measures: - Lifted import restrictions and will continue to phase out administrative measures (import restrictions, exchange restrictions, MCPs, CFMs) as conditions allow. - Removed restrictions on personal vehicles on January 31, 2025, except a few categories specified in the gazette for environmental and safety reasons. - Remaining restrictions planned for elimination when conditions allow include: - Exchange restrictions: (i) levy of a 2.5 percent stamp duty on credit card transactions abroad; (ii) levy of a 14 percent remittance tax on nonresidents’ profits; (iii) limits on repatriation by nonresidents of proceeds derived from current transactions; (iv) requirement to provide a tax clearance certificate prior to permitting transfers for certain current transactions. - Two MCPs arising from: (i) levy of a 2.5 percent stamp duty on credit card transactions abroad; (ii) levy of a 14 percent remittance tax on nonresidents’ profits. - CFMs introduced or tightened since 2020 include measures on repatriation, surrender requirements for exporters and banks, suspension/limitation on outward remittances on capital transactions, restrictions on purchases of Sri Lankan ISBs by local banks, and limitations on outward transfers of funds by emigrants. - Actions taken since program approval: removed surrender requirement for banks on purchases of proceeds from both goods and service exports and inward worker remittances; relaxed CFMs on outward remittances on capital transactions made by residents and outward transfers of funds by emigrants. - Commitment during program period (continuous PC): - Not to introduce or intensify exchange restrictions or MCPs. - Not to impose or intensify import restrictions for BOP purposes. - Not to conclude any bilateral payment agreements inconsistent with Article VIII. - Seeking temporary approval of all exchange restrictions and MCPs and developing a plan, shared with IMF Staff, for phased removal during the program period as macroeconomic stability is achieved. ### Financial stability and banking sector reforms - Banking sector capitalization and NPLs: - NPL Ratio declined from 12.8% at end-2023 to 12.3% at end-2024. - Parate executions reinstated on December 15, 2024 (June 2025 SB). - CBSL published guidelines on relief measures for SMEs by licensed banks. - Insolvency and supervisory measures: - Will enact the Rescue, Rehabilitation and Insolvency Bill to provide orderly insolvency processes to support NPL recovery and efficient capital allocation. - CBSL will continue forward-looking stress tests and may impose capital requirements under Pillar 2 of Basel standards if needed. - Modernizing supervision and crisis management: - Continue implementation of the resolution framework and enhance deposit insurance scheme. - Work with IMF TA to enhance bank liquidity monitoring, including introduction of Internal Liquidity Adequacy Assessment Process (ILAAP) for banks. - Review the Finance Business Act to enhance supervision, regulation, and resolution framework of finance companies; and the Finance Leasing Act to address irregularities in leasing activities. - Amended Finance Business Act expected to be submitted to Parliament by end-September 2025. - State-owned banks (SOBs): - Framework adopted (May 2024 and amended May 2025) to ensure SOB boards and senior management nominations are merit-based, independent, and transparent. - By July 2025, MOF will conclude selection of Board of Directors members of SOBs and submit to CBSL for vetting to: - Ensure boards have not less than nine and not more than thirteen members. - Ensure independent directors comprise the majority of the total number of directors of each SOB board (new SB). ### Reducing corruption vulnerabilities and governance measures - Governance and anti-corruption commitments: - Government Action Plan will be updated and published annually and its implementation assessed quarterly. - Anticorruption legal frameworks and institutions: - Rapid operationalization of the AC Act considered critical. - CIABOC published asset declarations for senior officials in line with the AC Act. - Enacted Asset Recovery Law (Proceeds of Crime Act) harmonized with the United Nations Convention Against Corruption on April 8, 2025 (SB). - Strengthen asset declaration system by June 2025 (SB) with specific actions: - (i) Allow public access to published declarations through foreign and local phone numbers or email accounts and make posted forms downloadable. - (ii) Publish remaining asset declarations of senior officials along with the list of non-filers. - (iii) Revise existing form to include beneficial ownership information. - (iv) Modify current rules on redactions so that some 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 by senior officials by end-September. - Appoint an expert committee to collate and review all materials pertaining to disciplinary control and conduct of judicial officers by end-2025. ### Strengthening tax exemptions framework - Recent policy and commitments: - Since December 2023, no longer providing any tax exemptions or incentives or approving new projects under the Strategic Development Projects (SDP) Act. - Between January and September 20, 2024, Business of Strategic Importance (BSI) designations granting tax exemptions to 24 companies were gazetted without consulting IMF staff (four Primary Businesses, three Duty Free Businesses, 17 Secondary Businesses). - Four pending Primary Business applications with land lease payments and deposits accepted; due to advanced financial arrangements, exemptions will be provided to these four businesses based on detailed costs-to-benefits review. - Commit to not provide any further BSI status and corresponding tax exemptions under current Port City Act and regulations; a new continuous SB will be added to the program on not granting new tax exemptions based on existing Port City and SDP Acts. Pending applications carved out of this continuous SB. - All further applications (including pending) will be considered under amended Port City Act and regulations in line with IMF TA and coordination with IMF staff. - Continuous SB will be removed in consultation with IMF staff upon successful amendments to the SDP and Port City Acts and regulations. - Commit to provide monthly data to the IMF team on list of all firms receiving new exemptions under both Port City and SDP Acts. - Legislative timetable for amendments and transparency: - Submit to Parliament by end-August 2025 amendments to the SDP Act, consistent with IMF technical assistance, to introduce transparent, rules-based eligibility criteria and limit duration of incentives (SB). - Submit to Parliament by end-October 2025 amendments to the Port City Act, based on IMF technical assistance, to introduce transparent, rules-based eligibility criteria and limit duration of incentives (new SB); ensure robust enforcement of rules limiting investments into Port City projects to new foreign direct investment. - Continue to publish, on designated websites (Promise and MOF) on a semi-annual basis, all required documents stipulated in the SB. - Publish improved annual tax expenditure statement incorporating recommendations from IMF technical assistance by November 2025. *Source: 1lkaea2025002-print-pdf - 15. We will improve the transparency of electricity tariff revisions and strengthen* ### 36. Prioritize anti-corruption reforms in our customs department to curb revenue ### 36. Prioritize anti-corruption reforms in our customs department to curb revenue ### Customs anti-corruption and trade facilitation measures - Approve necessary legislation by end-October 2025 to mandate the Customs Department of Sri Lanka (CDSL) with clear and unfettered responsibility for the clearance, movement, and control of goods to and from the special economic zones (SEZ) (new SB). - 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. - Begin quarterly publication (on the Ministry of Finance website) by each revenue department to Ministry of Finance on the implementation progress of the anti-corruption measures including the digitization and automation beginning from second quarter of 2025, to discuss progress up to the previous quarter. ### Procurement and public contracting reforms - Operationalized the National Procurement Commission and adopted an action plan. - Commitments and timelines: - enact a Public Procurement Law by July 2025 that reflects international good practice and in coordination with the ADB and WB; - further strengthen the e-procurement system; - eliminate procurement contracts awarded through a non-competitive process; - begin pilot of national and international competitive bidding for the procurement of goods and works under the digital platform in September 2025 and a full roll out by end-December 2025. ### Public asset oversight and management - Commit to strengthening regulatory framework overseeing and managing public assets: - submit to Cabinet by end-September 2025 the proposed criteria for allocating rights to public assets, with clear requirements for transparency, competition, and information provision to the public and a timeline to bring existing laws and regulations in compliance with the policy; - enact the Public Asset Management Bill with a view to improve the transparency, management, and disposal of all public assets by July 2025; - make adjustments to regulations implementing the National Audit Act to facilitate the effective levying of fines on officials, including Chief Accounting Officers who fail to fulfill their responsibilities in overseeing and managing the public assets by June 2025. ### AML/CFT strengthening measures - Based on the AML/CFT National Policy for 2023-2028 and the National ML/TF Risk Assessment (NRA) result, already begun: - strengthening the AML/CFT regime and preparing for the comprehensive AML/CFT assessment by the Asia Pacific Group on Money Laundering (ML) in 2026; - improving the AML/CFT legal framework focusing on enhancing the transparency of legal persons and arrangements and beneficial ownership requirements. - Going forward (specific measures and timelines): - Finalize amendments to the Companies Act to bring the beneficial ownership framework in line with the FATF standards by end-June 2025. - Implement measures to improve the effectiveness of ML investigations, prosecutions, and asset recovery, including increasing the number of investigations related to the threats identified in the NRA, developing the confiscation policy guidelines and relevant capacity of the prosecutors, investigators, and judiciary. - Strengthen the use of financial intelligence to identify potential corruption activities and the cooperation between FIU, law enforcement, and CIABOC to facilitate parallel investigations. - Improve the risk-based AML/CFT supervision of financial institutions through better supervisory capacity and regular supervisory engagements focused on compliance with beneficial ownership requirements and enhanced due diligence measures for politically exposed persons. ### Growth-enhancing structural reforms (overview) - Trade reforms to bolster exports: - implement regulations to rationalize para-tariffs with due consideration to revenue implications; - custom reforms to facilitate trade including through recommendations under the Trade Facilitation Agreements; - adopt a National Export Strategy with a focus on expediting negotiations of Free Trade Agreements and entry into regional trade blocs. - priorities include improving export competitiveness, developing the industrial sector, and transforming information technology, business process outsourcing, and Tourism sectors to key service exports. - Private sector development: - reduce red tape and modernize regulatory and business environments; - reduce electricity costs by improving the generation mix and electricity distribution efficiency; - reduce the public sector’s role in the economy to enable more efficient resource allocation and foster competition; - develop e-land titling and registry to improve access to land and property rights more broadly. - Labor market reforms: - strengthen labor laws to improve labor market flexibility (for example the proposed Employment Act); - improve education to boost 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: - enhance electricity generation from renewable resources including solar and wind; - rely on private sector financing and multilateral financing to help meet the envisaged annual investments; - proactively engage with multilateral partners to build technical capacity to catalyze rapid implementation of climate mitigation and adaptation efforts. ### Program risks, contingency planning, and monitoring - Contingency commitments: - undertake contingency revenue measures immediately if signs of revenue shortfall emerge due to dependence on motor vehicles related import taxes (¶5); - targeted spending cuts will be the last line of defense instead of across-the-board under-execution; - tighten monetary policy on a data-driven basis should inflation upside risks materialize; - remedy reserves underperformance by the introduction of explicit FX intervention rules to avoid hindering necessary exchange rate adjustment. - Monitoring and safeguards: - conduct weekly monitoring meetings with the IMF to ensure program performance remains on track. - 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. - request waivers of applicability for end-June QPCs for which data is not expected to be available. *Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1lkaea2025002-print-pdf.pdf* ### Annex I ### Annex I — Quarterly Tax Administration KPIs (Sri Lanka) ### KPI-2.1: Tax Return Filing Compliance of Large Taxpayers - Definition: Percentage of expected tax returns from large taxpayers by the due date: (1) VAT – one-month after monthly or quarterly deadline; (2) PAYE by April 30; (3) CIT by November 30. - 2023 TADAT Assessment (P4.12) baselines: - On-Time CIT Filing: 93.4 percent - On-Time VAT Filing: 82.6 percent - PAYE baseline: 23.6 percent (covers all employers not just under LTO control) - Targets and outcomes: - 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 - Outcome: 90.8% VAT returns on-time (period unspecified) - Target: 95 % of CIT returns on-time — Outcome: 92.5 % of CIT returns on-time - Target: 95 % of VAT returns on-time — Outcome: 91.6% VAT returns on-time - Multiple proposed targets through June 2026 include: Target: 90 % of PAYE returns on-time; Target: 95 % of VAT returns on-time; Target: 95 % of CIT returns on-time; Target: 70 % of PAYE returns on-time. (80% by July; 95% by August – performance reported for Q3.) ### KPI-2.2: Tax Return Filing Compliance of Non-Large Taxpayers - Definition: Percentage of expected tax returns from non-large taxpayers by the due date. - 2023 TADAT Assessment (P4.12) baselines: - On-Time CIT Filing: 32 percent - On-Time VAT Filing: 45.5 percent - PAYE Filing: 23.6 percent - Targets and outcomes: - 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 VAT returns on-time — Outcome: 49.5% VAT returns on-time - Target: 65 % of VAT returns on-time — Outcome: 56.6% VAT returns on-time - PAYE and CIT targets/outcomes: - Target: 60 % of PAYE returns on-time — Outcome: 12% achieved - Target: 50 % of CIT returns on-time — Outcome: 28.7 % of CIT returns on-time - Target: 60 % of PAYE returns on-time (repeated) - Target: 60 % of CIT returns on-time (repeated) - Proposed target: 25 % of PAYE returns on-time. (60 % by August – performance reported for Q3.) ### 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 returns (adjust for mandatory filing 2024). - 2023 TADAT assessment (P4.14) baseline: 23 percent of IIT returns electronically filed 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 - Target: 50 % filed electronically — Outcome: 98.4 % filed electronically - Target: 60 % filed electronically — Outcome: 98.4 % filed electronically - Subsequent proposed targets through June 2026: Target: 60 % filed electronically; Target: 80 % filed electronically; Target: 95 % filed electronically; Target: 98 % 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. - 2023 TADAT assessment (P5.18) baseline: 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 - Target: Collectible debt is not above 12 % of 2024 revenue target — Outcome: 8.3% achieved - Target: Collectible debt is not above 11 % of 2025 revenue target — Outcome: 8.0% achieved - Proposed targets through June 2026: Collectible debt is not above 10 % of 2025 revenue target; Collectible debt is not above 10 % of 2026 revenue target. ### KPI-4.1: VAT Registration - Historical note: 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 - Target: 20,000 active VAT & 12,000 SSCL registered taxpayers — Outcome: VAT – 21,281; SSCL – 12,102 - Target: 22,000 active VAT & 13,000 SSCL registered taxpayers — Outcome: VAT – 22,172; SSCL – 12,724 - Subsequent targets proposed through June 2026: - 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 - 26,000 active VAT & 17,000 SSCL registered taxpayers - 27,000 active VAT & 18,000 SSCL registered taxpayers *Source: Annex I (Quarterly Tax Administration KPIs), Sri Lanka IMF document.* ### Annex II — Business of Strategic Importance (BSI) Applications in Consideration (Selected entries) - Primary BSI Applicants and key facts: - Ceylon Real Estate Holdings (Private) Limited - Ownership: Sri Lankan - Purpose: Develop mixed use real estate plot - Date of Authorized Person Approval by Port City Commission: August 7, 2024 - Size of committed investment: USD 518 million - Status of Lease Agreements: Land lease agreements already signed in December 2021 - Other pertinent facts: Already received BSI status and exemptions for three land plots, attempting to amend to one plot - IFC Colombo 1 (Private) Limited - Ownership: Foreign - Purpose: Develop mixed use real estate plot - Date of Authorized Person Approval by Port City Commission: August 7, 2024 - Size of committed investment: USD 143 million - Status of Lease Agreements: Advances against the lease amount paid on September 30, 2024 - ICC Port City (Private) Limited - Ownership: Sri Lankan - Purpose: Develop residential real estate plot - Date of Authorized Person Approval by Port City Commission: January 15, 2025 - Size of committed investment: USD 112 million - Status of Lease Agreements: Advances against the lease amount paid on April 30, 2025 - Clothespin Management and Development (Private) Limited - Ownership: Foreign - Purpose: Develop hotel real estate plot - Date of Authorized Person Approval by Port City Commission: March 7, 2025 - Size of committed investment: USD 540 million *Source: Annex II (Business of Strategic Importance applications), Sri Lanka IMF document.* ### Attachment II — Technical Memorandum of Understanding (TMU): Monitoring Framework and Performance Criteria ### Purpose and scope - Establishes framework for monitoring Sri Lanka’s performance under the program supported by the Extended Arrangement under the Extended Fund Facility (EFF). - Specifies performance criteria and indicative targets (including adjustors) assessed through semiannual reviews. - Monitoring procedures and reporting requirements specified. ### Quantitative performance criteria and indicative targets (listed) - a) Central government primary balance (floor) - b) Central government tax revenue (floor) - c) New expenditure arrears of the central government (ceiling) - d) Net official international reserves (floor) - e) CBSL’s net credit to the government (ceiling) - f) Continuous QPC on new external payment arrears of the nonfinancial public sector and the CBSL (ceiling) - g) Performance criterion on new CBSL’s 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) - m) Indicative target on the stock of expenditure arrears of the central government (ceiling) ### Definitions and measurement conventions (selected) - Central government includes line ministries, departments, and other public institutions; excludes CBSL, state-owned enterprises, parastatals, and agencies that do not receive subventions from the central government. - Debt defined in accordance with paragraph 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements attached to Executive Board Decision No. 16919-(20/103), adopted October 28, 2020. - Primary balance of the central government on cash basis: central government revenues and grants minus expenditures and net lending, plus interest payments; measured as the overall balance of the central government plus the interest payment of the central government (financing side defined as the negative sum of listed items). - Government equity injections into banks for recapitalization will not be recorded as central government expenditure; equity injections into other corporations will be recorded as central government expenditure. - Expenditure arrears definition: financial liabilities unpaid at the maturity date established by written law or contract; where maturity not established, maturity is 90 days from relevant invoice or contract satisfaction. - Central government tax revenue: revenues from taxes collected by the central government; excludes asset sales, grants, and non-tax revenues; revenue target is cumulative flow from the beginning of the year. ### Performance Criterion on Net Official International Reserves (Program NIR) - Program NIR measured as difference between: a) CBSL’s conventional NIR (gross foreign assets minus liabilities plus DSTs Special Dollar, Japanese Yen, and Chinese Yuan Revolving accounts), and b) CBSL’s outstanding liabilities (net short positions) in foreign exchange swaps with domestic commercial banks. - Conversion to U.S. dollar terms at program exchange rates and gold price specified (paragraph 9 and Table 1). - Valuation: monetary gold at US$1,831.615 per troy ounce (price prevailing on January 3, 2023 as per CBSL). ### Program exchange rates (Rates as of January 3, 2023) - Sri Lanka rupee: 363.11 - British pound: 0.838012 - Japanese yen: 132.650000 - Canadian dollar: 1.365800 - Euro: 0.948317 - Chinese yuan: 6.892800 - Australian dollar: 1.497006 - Swiss franc: 0.939650 - SDR: 0.752014 - Memorandum: Gold price, US$/oz: 1831.62 - Note: JPY and AUD rates as of December 23, 2022 ### Adjustment to Program NIR floor (summary) - If actuals for the following are higher/lower in U.S. dollar terms 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 specified: - (i) amount of foreign program financing (exclusive of EFF disbursements) by the central government - (ii) net borrowings from SLDBs and FCBUs by the central government in FX terms - (iii) external commercial loans (including international sovereign bonds and syndicated loans) borrowed by the central government - (iv) 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 defined as cash receipts from sale or lease of publicly held assets (including 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. *Source: Attachment II (Technical Memorandum of Understanding), Sri Lanka IMF document.* ### 12. If the sum of amortization of total external debt and interest payments on total external ### 12. 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, as well as the sum of 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 ### External financing and NIR adjustors (Table 2a: Program Assumptions, 2025; cumulative from the beginning of each calendar year, in million US$) - Program test dates: Mar. 2025, Jun. 2025, Sep. 2025, Dec. 2025 - Foreign program financing of the central government: 188, 288, 573, 725 - 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, 1,435 - Interest and Amortization payments on FX restructured CPC loans by central government: 58, 116, 174, 213 - Interest payments on total external debt owed by the central government (excl. IMF): 290, 580, 870, 1,189 - 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 - Adjustment rule: 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, plus interest payments on SLDBs and FCBUs (in U.S. dollar terms) deviates from program assumptions (Table 2a. or 2b.), the floor on the Program NIR will be adjusted downward/upward by the cumulative differences on the test date. - Definition note: 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. - Applicability: These adjustors will apply to the NIR floor for end-December 2022 and thereafter. ### Adjustor cap for project loans and grants - 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, and at $125 million for January-June 2026. - The other adjustors will be uncapped. ### External financing and NIR adjustors (Table 2b: Program Assumptions, 2025–26; cumulative from the beginning of each calendar year, in million US$) - Program test dates listed: Sep. 2025, Dec. 2025, Mar. 2026, Jun. 2026 - Foreign program financing of the central government: 573, 725, 65, 405 - 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): 1,111, 1,435, 294, 752 - Interest and Amortization payments on FX restructured CPC loans by central government: 174, 213, 53, 106 - Interest payments on total external debt owed by the central government (excl. IMF): 870, 1,189, 274, 550 - 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: 525, 700, 175, 350 ### NIR outperformance - 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. --- ### E. Performance Criterion on the CBSL’s Net Credit to the Government (NCG) ### Measurement of 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, - long-term or outright open market operations. - For program monitoring, government securities acquired through purchases solely for monetary policy purposes (e.g., standing lending facility and short-term open market operations) and emergency liquidity assistance (ELA) operations, on a temporary basis with an agreement to reverse the transaction in less than 90 days, will be excluded from the CBSL’s claims on the central government. - For program monitoring, the stock of government securities held by the CBSL will be measured in the face value. b) The central government’s Rupee-denominated deposits at the CBSL. - The 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). - Applicability: This adjustor will only apply to the NCG ceiling during six months after the Board date of the First review. - Conversion: The foreign currency amounts will be converted to Sri Lankan rupees using the program exchange rates defined in paragraph 9. --- ### II. Continuous Performance Criteria ### F. New external payment arrears (nonfinancial public sector and CBSL) - A continuous performance criterion applies to the non-accumulation of new external payments arrears on external debt contracted or guaranteed by the nonfinancial public sector and the CBSL. - Definition and scope: - Nonfinancial public sector defined following the 2001 Government Finance Statistics Manual and the 1993 System of National Accounts; includes central government and nonfinancial public enterprises (boards, enterprises, and agencies in which the government holds a controlling stake). - External payments arrears consist of debt-service obligations (principal and interest) to nonresidents that have not been paid at the time they are due, as specified in the contractual agreements, subject to any applicable grace period. - Exclusions: Overdue debt and debt service obligations that are in dispute will not be considered external payments arrears for program monitoring. Arrears resulting from nonpayment of debt service for which a rescheduling or restructuring agreement is being sought are excluded. - Monitoring: This continuous performance criterion will be monitored continuously by the authorities and any non-observance will be immediately reported to the Fund. ### G. New CBSL’s purchases of government securities in the primary market - Continuous performance criterion: ceiling of zero on new purchases of government securities by the CBSL in the primary market on a continuous basis. - 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). - Applicability: This adjustor will only apply to the ceiling during six months after the Board date of the First review. - Conversion: The foreign currency amounts will be converted to Sri Lankan rupees using the program exchange rates defined in paragraph 9. ### H. Other continuous performance criteria (restrictions and practices) - 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. --- ### III. Monetary Policy Consultation Clause ### Inflation target measurement and consultations - Inflation metric: 12-month rate of inflation in consumer prices measured by the headline Colombo Consumer Price Index (CCPI) published by the Department of Census and Statistics of Sri Lanka. - Index base: CCPI index (2021=100) will be used to measure actual inflation. - Year-on-year inflation for each test date is measured as: { CCPI*(t) – CCPI*(t-12) } / CCPI*(t-12) where: - t = the month within which the test date is included - CCPI(t) = CCPI index (all items) for month t - CCPI(t-k) = CCPI index (all items) as of k months before t - CCPI*(t) = { CCPI(t-2) + CCPI(t-1) + CCPI(t) } / 3 - CCPI*(t-12) = { CCPI(t-14) + CCPI(t-13) + CCPI(t-12) } / 3 - Consultation triggers: - If observed year-on-year inflation for the test date falls outside the outer bands specified in Table 1 attached to the MEFP, the authorities will complete a consultation with the IMF Executive Board focusing on: (i) the stance of monetary policy and whether the Fund-supported program remains on track; (ii) the reasons for the deviation; and (iii) the proposed policy response. - When the consultation with the IMF Executive Board is triggered, access to Fund resources would be interrupted until the consultation takes place and the relevant program review is completed. - If observed year-on-year inflation falls outside the inner bands specified in Table 1 attached to the MEFP for the test date, the authorities will complete a consultation with IMF staff on the reasons for the deviation and the proposed policy response. --- ### IV. Indicative Targets ### I. Indicative target on Social Safety Net (SSN) spending - SSN spending definition: central government’s spending on SSN programs comprising: 1) Aswesuma cash transfers, consisting of: - cash grants for low-income households, - assistance to the elderly (over 70 years of age), - allowance for disabled people, - financial support for kidney patients, - financial assistance to purchase school stationery; 2) support under the empowerment program. - Classification: These classifications are in line with reporting in the Ministry of Finance Annual Report (Table 9). ### J. Indicative target on Cost of Non-Commercial Obligations (NCOs) for Fuel and Electricity (Net of Government Transfers) - Definition: NCOs for fuel and electricity refer to obligations of Ceylon Petroleum Corporation (CPC) and Ceylon Electricity Board (CEB) to supply fuel and electricity at prices below cost-recovery levels. - Target basis: Indicative target is set on the cost of fuel and electricity NCOs net of government transfers, i.e., the cost of the NCOs that are not compensated by the central government budget. #### Measurement of fuel NCOs - Cost of NCOs for fuel during each quarter = cost of sales (including fuel cost, terminal charges, transport charges, personnel cost, other operational expenses, exchange rate variation, and finance cost; excluding sales taxes) minus revenues (net of sales taxes) with regard to fuel supplies by CPC for transport, power generation, aviation, industries, kerosene and LPG, and agrochemicals. - If revenues (net of taxes) exceed cost of sales, the cost of NCOs for fuel is zero. - Government transfers to cover fuel NCOs are measured as central government current transfers disbursed to CPC. #### Measurement of electricity NCOs - Starting January 1, 2024: cost of NCOs for electricity during each quarter = total expenditures (including energy purchases and allowed revenue for transmission) minus total sales revenues from 5 distribution licensees under CEB, as shown in the statement of the Bulk Supply Transaction Account managed by CEB. - Until January 1, 2024: cost of NCOs for electricity during each quarter = total losses as reported on the CEB’s financial statement. - If total sales revenues exceed total expenditures, the cost of NCOs for electricity is zero. - Government transfers to cover electricity NCOs are measured as central government transfers disbursed (including capital injection as specified in paragraph 6) to CEB. #### Timing and aggregation for program monitoring (accounting for time lag) - 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) } - Variable definitions: - NCO(q) = cost of NCOs for fuel and electricity during quarter “q” - NCO_fuel(q) = cost of NCOs for fuel during quarter “q” - NCO_electricity(q) = cost of NCOs for electricity during quarter “q” - NCO(q) = NCO_fuel(q) + NCO_electricity(q) - G(q) = central government transfers to CPC and CEB disbursed during quarter “q” - G_fuel(q) = central government transfers to CPC disbursed during quarter “q” - G_electricity(q) = central government transfers to CEB disbursed during quarter “q” - G(q) = G_fuel(q) + G_electricity(q) ### K. Indicative target on Treasury Guarantees - Definition: Treasury guarantees are outstanding debt guarantees issued by the central government. A guarantee of a debt refers to any explicit legal obligation of the central government to service such a debt in the event of nonpayment by the recipient. - Exclusions: Treasury guarantees exclude letters of comfort. - Outstanding guarantees: defined as the drawn amounts of guaranteed debts (differ from issued guarantees which include guaranteed debts not disbursed yet). - Inclusion: Treasury guarantees include outstanding treasury guarantees published in the Statement of Contingent Liabilities in the Annual Report of the Ministry of Finance. - Currency conversion: Rupee values for guarantees issued in other currencies will be calculated using the exchange rate for the last day of the calendar year as it appears in the Statement of Contingent Liabilities in the Annual Report of the Ministry of Finance. ### L. Indicative target on Foreign Exchange Treasury Guarantees - Definition: Foreign exchange treasury guarantees are outstanding debt guarantees issued in foreign currency by the central government. - Same structural definitions, exclusions, and conversion rules as in section K apply. - Rupee values for the FC guarantees will be calculated using the exchange rate for the last day of the calendar year as it appears in the Statement of Contingent Liabilities in the Annual Report of the Ministry of Finance. ### M. Indicative target on Stock of Central Government’s Expenditure Arrears - The same definition of arrears as in Para 7 will apply. - The stock of arrears will be based on those identified as of May 14, 2025. --- ### V. Data Reporting Requirements ### General reporting obligations - Sri Lanka shall provide the Fund, through reports at intervals or dates requested by the Fund, with such information as the Fund requests in connection with the progress of Sri Lanka in achieving the objectives and policies set forth in the Memorandum of Economic and Financial Policies and Letters of Intent. - All program monitoring data will be provided by the Ministry of Finance and the CBSL. ### Specific data formats and frequencies (tables referenced) - Fiscal performance and expenditure arrears: format as shown in Tables 3, 4, and 5. - NCG targets: format shown in Table 6. - External sector performance: format shown in Tables 7 and 8. - Social safety net spending: format shown in Table 9, on a quarterly basis. - Financial performance of state-owned enterprises—CEB, CPC, and Sri Lankan Airlines: formats shown in Tables 10, 11, and 12, respectively, on a quarterly basis. - BSTA weekly operation statements of the CEB: provided no later than seven days after the end of each week. - Cost of fuel NCO (net of government transfers): format shown in Table 13, on a quarterly basis. - Treasury guarantees: format shown in Table 14, on a quarterly basis. - For assessment of Multiple Currency Practices: data and information on official exchange rate action and impact on rates will be provided, as requested by IMF staff. ### Reporting timetables (data submission deadlines) - Fiscal targets (Table 3, Table 4, Table 5): within no more than five weeks after the end of each month, except: - salaries and wages, goods and services, subsidies and transfers (and its subcomponents): within no more than seven weeks after the end of each month; - total recurrent expenditure and interest payments: within no more than five weeks after the end of each month. - Monetary targets (Table 6): within no more than four weeks after the end of each month. - External targets (Table 7 and Table 8): within no more than 25 days after the end of each month. - Indicative target on social safety net spending (Table 9): within no more than two months after the end of each quarter. - State-owned enterprises (Tables 10–12): within no more than 2 months after the end of each quarter. - Indicative target on the cost of fuel NCO (net of government transfers) (Table 13): within no more than 5 weeks after the end of each quarter. - Indicative target on treasury guarantees (Table 14): within no more than two months after the end of each quarter. ### Financial sector monitoring (quarterly update and bank-level data) - 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/weekly/monthly/quarterly submission timelines: - Daily financial sector data: 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: 1lkaea2025002-print-pdf* ### 33. For the purposes of monitoring tax exemptions granted under the SDP and Port City Acts, ### 1lkaea2025002-print-pdf - 33. For the purposes of monitoring tax exemptions granted under the SDP and Port City Acts, ### Monitoring of tax exemptions under the SDP and Port City Acts - Authorities will provide data on a monthly basis on the list of all firms receiving new exemptions under both the Port City and SDP Acts. - This data will be provided two weeks after the end of each month. ### Fiscal and macro-fiscal reporting templates and monitoring tables - The document includes templates and headings for the following central government and program-monitoring tables (values and row labels shown in source): - Table 3. Sri Lanka: Central Government Operations (In millions of rupees) — covering: Total Revenue and Grants; Total Revenue; Tax Revenue; Income Taxes (Personal & corporate; Corporate & non-corporate; Personal; Corporate; Personal Income Tax (PAYE)); Economic Service Charge; Interest Income tax; Tax on goods & services (VAT: Domestic, Imports); Excise Taxes (Liquor, Cigarettes, Motor vehicles, Petroleum, Other); Other taxes & levies incl. SSCL; Social Security Contribution Levy (Domestic, Imports); Other Taxes and Levies; Tax on external trade (Import Duties, Cess Levy, Special Commodity Levy, Ports & Airports Development Levy); Non Tax Revenue (Property Income, Fines, Fees and Charges, Other); Grants; Total Expenditure (Current Expenditure; Salaries & wages; Goods & services; Interest payments; Subsidies & transfers; Public Corporations; Public Institutions; Households; Capital Expenditure; Net Lending); Primary balance; Overall balance; Total Financing; Total Foreign Financing (Net); Total Domestic Financing (Net); Privatization. - Table 4. Sri Lanka: Central Government Financing (In millions of rupees) — includes note: “The template has been modified to include the change in the Treasury Single Account as a financing item.” Rows include (i) Borrowing/Cash inflow, (ii) Repayment/Cash outflow, (iii) Net; Sri Lanka Development Bond (SLDB) 1/; Loans; Other (specify); Net foreign financing (International Sovereign Bonds 2/; Official project loans; Official program loans); Domestic financing in local currency; Domestic financing in foreign currency (T-bills 1/; T-bonds 1/; Loans; Deposits and overdrafts at banks; CBSL advances and deposits; Other (specify)); notes: “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.” - Table 5. Sri Lanka: Unpaid Bills and Arrears 1/ (In millions of rupees) — rows for Recurrent, Capital, Total, and amounts o.w. more than 3 months; note: “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) — covers Total inflows and outflows (without swaps), net FX purchases from market, swaps with domestic commercial banks, net inflows (incl. and excl. swaps), Net International Reserves (at market rates and at program rates), Gross International Reserves (at market rates), Changes in Reserve Related Liabilities (Change in ACU liabilities, Change in liabilities to IMF — existing debt service (amortization), new purchases), International swaps with foreign CBs (inflows, outflows), Valuation changes, Changes in CBSL other liabilities; note: “1/ As agreed for the purpose of monitroing the program.” - Table 8. Sri Lanka: Gross Official Reserve Position 1/ (In millions of U.S. dollars) — note: “1/ As agreed for the purpose of monitoring the program.” - Table 9. Sri Lanka: Social Safety Net Spending 1/ (by Month) (In millions of rupees) — includes Budget Code, Total, Of which, externally financed, Total Social Safety Net Spending = (1)+(2); Cash transfers lines including Aswesuma cash transfers and associated budget codes; Empowerment Program and project lines; note: “1/ In line with the reporting of the Ministry of Finance Annual Report.” - Table 10. Sri Lanka: Financial Outturn of Ceylon Electricity Board 1/ (In millions of rupees) — rows: Total revenue (Sale of electricity, Other income), Total expenditure (Direct generation cost, Generation, transmission, and distribution O&M cost, Corporate expenses, Interest on borrowings and delayed payments, Depreciation, Other cost), Operating profit/loss, Liquidity position (Borrowings from banks, Payments to banks, Outstanding debt to banks), Purchases from CPC and IPP, Payments to CPC and IPP, Outstanding to CPC and IPP; note: “1/ As agreed for the purpose of monitoring the program.” - Table 11. Sri Lanka: Financial Outturn of Ceylon Petroleum Corporation 1/ (In millions of rupees) — rows: Total revenue (Octane 90, Diesel, Other products, Other income), Total expenditure (Cost of sales, Sales and distribution, Administration, Finance cost, Depreciation, Other cost), Operating profit/loss, Outstanding dues to state banks; note: “1/ As agreed for the purpose of monitoring the program.” - Table 12. Sri Lanka: Financial Outturn of Sri Lankan Airlines 1/ (In millions of rupees) — rows: Total revenue (Passenger, Cargo, Other income), Total expenditure (Aircraft fuel cost, Employee cost, Other operating expenses, Financial cost), Operating profit/loss, Capital contribution; note: “1/ As agreed for the purpose of monitoring the program.” - Table 13. Sri Lanka: Cost of Non-Commercial Obligations for Fuel 1/ (In millions of rupees, unless otherwise noted) — includes formulas (a=e-b; b=c-d; c; d; e=f+g+h+i; +j+k+l; f; g; h; i; j; k; l; m), Cost of NCOs, Net sales revenue (net of sales taxes), Sales revenue, Sales taxes, Total cost (net of sales taxes), Cost of sales, Terminal charge, Transport charge, Personnel cost, Other expenses, Exchange rate variation, Finance cost, Sales quantity, Product, Rs millions, Million liters, detailed product categories (A.TRANSPORT: Super petrol (92 octane), Unladed petrol (95 octane), Auto diesel, Super diesel; B.POWER GENERATION: Auto diesel, Fuel oil 800', Fuel oil 1500', Fuel oil 1500' low sulphur, Fuel oil 200', Naphtha; C.AVIATION: Jet A-1 (Foreign), Jet A-1 (Sri Lankan Airline), Jet A-1 (Local), Avgas; D.INDUSTRIES: Ind Kero, Fuel oil 800', S.B.P., Bitumen, Lubricant; E.DOMESTIC: Kerosene, LPG; F.AGRO: Agro chemicals; Total (A-F)); Memorandum item: Central government current transfers to CPC [x]; note: “1/ As agreed for the purpose of monitoring the program.” - Table 14. Sri Lanka: Treasury Guarantees 1/ (In millions of rupees) — rows: Treasury Guarantees Issued, Treasury Guarantees Outstanding, Total Treasury Guarantees, Ceylon Electricty Board, Ceylon Petroleum Corporation, National Water Supply and Drainage Board, Road Development Authority, SriLankan Airlines, Other; note: “1/ As agreed for the purpose of monitoring the indicative target under the program.” ### Program update and macro developments (Supplement and Supplementary Memorandum) - Document is a supplement updating developments since the June 16, 2025 report; dated June 30, 2025. - Key updates and staff assessments: - Headline inflation in Q2 2025: -1.1 percent y/y; remains below the 2 percent lower outer band of the Monetary Policy Consultation Clause (MPCC). - Staff support authorities’ request to complete monetary policy consultation with the Executive Board (Appendix I). - Low inflation drivers: energy price reductions and remaining (albeit shrinking) output gap. - Staff view: current monetary policy stance remains appropriate. - Staff are collecting information to assess end-June structural benchmarks (SBs). SBs on (i) enhancing the asset declaration system, and (ii) publishing procurement contracts and tax expenditure reports under the SDP and Port City Acts, including the list of recipient firms, are both on track. Staff expect both SBs to be met. - Real GDP growth for Q1 2025: 4.8 percent y/y, higher than 2.9 percent y/y projected in the framework. Recovery supported by manufacturing, construction, tourism, and financial sectors. Staff will reflect the GDP outturn in the Fifth Review and re-examine growth assumptions. - Debt restructuring progress: France has signed the bilateral restructuring agreement with Sri Lanka, joining India and Japan. Saudi Arabia and Kuwait also reached an Agreement in Principle consistent with program parameters with Sri Lanka. Sri Lankan Airlines has now hired financial and legal advisors to restructure its international bond. ### Appendix I — Consultation with IMF Executive Board on missed inflation target (June 30, 2025) - Context: - Inflation: -1.1 percent y/y in Q2 2025, below the 2 percent lower outer band of the MPCC. - Purpose: (1) explain reasons for inflation below the lower outer limit of MPCC band; (2) discuss policy response; (3) present inflation outlook. - I. Inflation deviation drivers: - Headline inflation has been lower than target since Q2 2024, and in deflation since Q4 2024. - Main drivers: - Electricity, other energy, and transport price reductions. Electricity tariff reduced by 22, 22.5, and 20 percent in March 2024, July 2024, and January 2025 respectively. Water tariffs reduced following lower electricity input cost. Multiple domestic fuel and LP gas price reductions aligned with global commodity prices. - Relatively stable exchange rate: rupee remains relatively unchanged year-on-year in nominal terms against the US dollar as of end-June 2025, although it has depreciated marginally by about 2.6 percent since the beginning of the year. Relative stability reflects buoyant external sector developments supported by strong tourism and remittances. - Output gap: residual slack—output remains below potential—has contained price pressures from recovering demand. - Prices have started to rebound since May 2025, but inflation remains low. - II. Policy response: - In 2024, around 125 basis points (bps) of cuts of effective policy rates were implemented. - CBSL cut the monetary policy rate by 25 bps in May 2025, bringing the policy rate to 7.75 percent. - Rationale: lower-than-expected inflation in the near term, further moderation of inflation expectations, and higher trade policy uncertainty going forward, notwithstanding better-than-expected external sector performance in 2025 so far. - CBSL stance: remain vigilant against upside inflation risks from global commodity price volatility (geopolitical tension, global trade policy shocks) and domestic factors (continuing demand recovery, possible food supply disruptions due to weather). CBSL committed to price stability and ready to act as necessary. - III. Inflation outlook: - CBSL forecasts suggest inflation should turn positive in the near term and gradually converge to the 5 percent target thereafter. - Drivers of rebound: appropriate monetary policy adjustments, electricity tariffs adjustment, demand recovery, and exchange rate effects. - CBSL will closely monitor policy impacts and global/domestic developments. ### Additional formal statements and dates - Supplement signed/dated: June 30, 2025. - Statement by PKG Harischandra, Alternate Executive Director for Sri Lanka: July 1, 2025 — thanking the Executive Board, Management, and Staff for their support during the 48-month Extended Fund Facility (EFF) arrangement approved in March. *Source: 1lkaea2025002-print-pdf - 33. For the purposes of monitoring tax exemptions granted under the SDP and Port City Acts,* ### 2023. We appreciate the unwavering dedication of the mission team, led by Mr. Papageorgiou, ### 1lkaea2025002-print-pdf - 2023. We appreciate the unwavering dedication of the mission team, led by Mr. Papageorgiou, ### THE CONTEXT AND PROGRAM PERFORMANCE - Sri Lanka has reached the halfway mark of its 48-month EFF arrangement. - Program continuation attributed to commitment of authorities, Fund Management and Staff, international financial institutions, creditor nations, and the Sri Lankan people. - Distinguishing features of current EFF arrangement: - Preconditioned on implementing measures to ensure public debt sustainability. - Enhanced focus on structural reforms: public financial and debt management, governance, and anti-corruption measures. - Stronger emphasis on social protection measures to shield vulnerable populations during fiscal consolidation. - Flexibility and adaptability through provisions for periodic reviews and adjustments. - Performance under EFF: - All end-March 2025 indicative targets, except for the stock of arrears, have been met. - All structural benchmarks due by end-May 2025 were either met or implemented with some delay. - Authorities are taking measures to clear domestic payment arrears while protecting other commitments, such as the primary balance target. - System improvements, best practices, and guidelines introduced in line with the new PFM law to prevent arrears accumulation. ### RECENT ECONOMIC DEVELOPMENTS AND RISKS TO THE OUTLOOK Key outcomes and indicators: - Growth: - 5% in 2024 (exceeded the 4.5% projection from the Third Review). - Q1-2025 estimated growth: 4.8%, compared with 5.1% in Q1-2024. - Sectoral contributors: manufacturing 9.6% y/y; construction 10.7% y/y; services (60% of economy) 2.8% y/y. - High-frequency indicators (May 2025): - PMI Manufacturing: 55.5 - PMI Services: 57.0 - Inflation and prices: - May 2025 headline inflation (deflation moderated): 0.7% (y/y), from 2% (y/y) deflation in April 2025. - Food inflation in May 2025: 5.2% (y/y). - Central Bank projects near-term return to positive inflation and gradual convergence toward the 5% target. - External and reserves: - International official reserves: US$ 6.3 billion by end-May 2025 (~four months of import coverage). - External current account remains in surplus; supported by strong remittance inflows and trade in services. - Fiscal: - Government revenue on track to reach 15% of GDP in 2025 (highest level in 15 years). - Primary surplus estimated at 1.7% of GDP for January-April 2025; aligning with projected 2.3% of GDP for 2025. Risks to outlook: - External risks: - Recent tensions in the Middle East could add downside risks. - Global trade tensions could disrupt external demand and trade flows. - Rising uncertainty in the Middle East may affect remittances. - Risks to energy prices and transportation costs could weigh on the external balance. - Possible global economic slowdown could dampen tourism and external demand. - Domestic risks: - Weather-related disruptions, exacerbated by climate change, threaten agricultural production, higher food prices, and economic instability. ### FISCAL CONSOLIDATION AND FISCAL STRUCTURAL REFORMS Fiscal outcomes and targets: - Government revenue: fell to 8.2% of GDP in 2022; projected to reach 15% of GDP in 2025. - Primary balance: -3.7% of GDP in 2022; expected to reach 2.3% of GDP in 2025. - Reported average annual adjustment in revenue: about 2.3 percentage points on average. Key reform actions: - Strengthen tax administration and compliance: improve VAT refund system, enhance VAT compliance with timebound targets, modernize tax collection authorities (Inland Revenue Department), re-register VAT payers, intensive audits on high-risk High Worth Individuals (HWI). - Preparatory measures for possible property tax by 2027: - Digitize historical property valuation records. - Create provisional digital nationwide Sales Price and Rents Register (SPRR) to generate a database of properties with estimated market values by mid-2026. - Public Financial Management: - Enactment: Parliamentary Budget Office Act of 2023; Public Financial Management (PFM) Act of 2024. - Rollout of Integrated Treasury Management Information System (ITMIS) nearing completion; planned integration with e-Procurement. - Full implementation of new PFM law by end of 2025; future budget submissions to include all required documentation. - SOE reform and energy pricing: - Restore cost recovery energy pricing; monthly retail fuel prices set at cost recovery levels. - Electricity tariffs set at cost recovery levels in June (recent revision). - Legacy debt of energy sector SOEs being paid off within the price-setting mechanism. - SOE law targeted by end of 2025 to strengthen governance, financial transparency, and accountability. - Ongoing Fund technical assistance in revenue forecasting and planned update of the 2018 Public Investment Management Assessment (PIMA). ### BOLSTERING SUPPORT FOR VULNERABLE AND SOCIAL SAFETY NET (SSN) REFORMS - Indicative Target (IT) on social spending met for the first time by end-March 2025 (first achievement since September 2023). - Measures taken: - Increased payments to identified groups and extended benefit payment periods for transitional and vulnerable groups. - Retroactive payments being processed for those initially left out due to onboarding challenges. - Enumeration of second-round applicants: 93% completion by end-May 2025; grievance handling to be expedited. - Revamp of Integrated Welfare Management System (social registry) to improve targeting efficiency for 3.4 million first-round applicants. - Empowerment programs: - World Bank and ADB-led empowerment pilot underway. - National empowerment program planned to support approximately 1.2 million beneficiaries over the next three years. - Policy intent to address moral hazard and promote employment and self-sufficiency. ### MAINTAINING PUBLIC DEBT SUSTAINABILITY - Staff assessment: Sri Lanka’s debt remains sustainable, with high risks going forward. - Debt restructuring status and creditor engagement: - Debt restructuring process largely concluded; substantial reduction in risk premia for international debt instruments in secondary markets. - Authorities expressed gratitude to creditor nations represented by the Official Creditor Committee (OCC) co-chaired by France, India, and Japan, as well as China and other non-OCC creditor nations. - Bilateral agreements already signed with France, India, and Japan. - Focus on finalizing bilateral agreements with OCC members and agreements with remaining non-OCC members and commercial creditors during 2025. - Private creditor cooperation instrumental in concluding debt restructuring negotiations in late 2024. - Institutional reforms: - Establishment of Public Debt Management Office (PDMO) under Public Debt Management Act of 2024 nearing completion; full operationalization aimed for December 2025. - Parliament repealed the Foreign Loan Act to consolidate debt management within the PDMO. - PDMO to update medium-term debt strategy (MTDS) and formulate annual borrowing plan (ABP) in line with PFM law; to be published alongside the 2026 Budget. ### MAINTAINING PRICE STABILITY AND EXTERNAL STABILITY Monetary and external buffer measures: - Monetary policy: - Authorities committed to proactive, data-driven monetary policy and elimination of monetary financing to anchor inflation expectations. - Central Bank of Sri Lanka (CBSL) maintains a 5% inflation target; monitored through the Monetary Policy Consultation Clause (MPCC) with regular consultations with Fund Staff. - CBSL will monitor upside and downside risks and conduct monetary policy to achieve price stability. - CBSL equity continues to improve and will be regularly assessed. - FX and reserves management: - CBSL building external buffers through market purchases of foreign exchange (FX) to meet program objectives of official reserve accumulation. - Commitment to maintain exchange rate flexibility and limit FX sales to address disorderly market conditions. - Authorities committed to phasing out remaining administrative measures introduced to support the balance of payments. - Deflation: - Deflation observed from September 2024 driven by supply-side factors (reductions in electricity tariffs, fuel prices, transport costs). - Deflation has alleviated burdens on businesses and households after prior cumulative price rises. ### STRENGTHENING FINANCIAL SECTOR RESILIENCE - Financial sector status: - System remains resilient and well-capitalized. - Credit growth has picked up; NPL ratio has started to decline from elevated levels. - Legislative and supervisory actions: - Rescue, Rehabilitation, and Insolvency Bill planned for enactment in 2025 to facilitate orderly insolvency and NPL recovery. - Finance Business Act under review; amended Finance Business Act expected to be submitted to parliament by end-September 2025. - Finance Leasing Act being revised to address irregularities. - Governance of state-owned banks (SOBs) to be strengthened via recently adopted framework ensuring SOBs meet same regulatory requirements as private banks. - CBSL to monitor capital and liquidity positions closely and take measures if needed. ### ADVANCING GOVERNANCE AND ANTI-CORRUPTION REFORMS - Legal and institutional steps: - Annual updates to Government Action Plan and quarterly implementation assessments. - Operationalization measures for the Anticorruption Act underway. - Asset Recovery Law enacted in April 2025; asset declaration system to be strengthened. - Amendments planned: - Strategic Development Projects Act by end-August 2025. - Port City Act by end-October 2025. - Customs Department legislation to address revenue leakages by end-October 2025. - Public Procurement Law drafting underway; expected enactment in 2025. - Public Asset Management Bill forthcoming; amendments to National Audit Act to facilitate effective levying of fines. - AML/CFT and beneficial ownership: - Continued strengthening of AML/CFT regime building on AML/CFT National Policy for 2023-2028. - Amendments to Companies Act to align beneficial ownership framework with FATF standards. - Measures to improve money laundering investigations, prosecutions, asset recovery, and the use of financial intelligence. ### GROWTH-ENHANCING STRUCTURAL REFORMS - Growth strategy priorities: - Private sector-led growth via improved business environment to boost foreign and domestic investment. - Trade liberalization, private sector participation, labor market reforms, climate adaptation and mitigation. - Public sector efficiency through digitalization and reduced government intervention. - Proposed Employment Act expected to enhance labor market flexibility and increase women's workforce participation. - Efforts to boost renewable energy sources. - Educational reforms to improve human capital and align workforce skills with market demands. ### CONCLUSION - Authorities view EFF commitments as pivotal to strengthening public financial management and governance to address long-standing issues. - Authorities express gratitude for technical and capacity development support from Fund Management and Staff, and support from multilateral and bilateral partners. - Mission Team and authorities monitor EFF deliverables weekly to enable timely corrective measures and contingency planning. - Authorities appreciate the support of the Executive Directors for completion of the fourth review under the EFF arrangement. *Source: 1lkaea2025002-print-pdf - 2023. We appreciate the unwavering dedication of the mission team, led by Mr. Papageorgiou,* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1lkaea2025002-print-pdf.pdf_