## _cr0584

## Source details

**Canonical URL:** [_cr0584](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0584.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0584.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0584.pdf.json)

---

### Executive Summary — Background
- Tsunami of December 26, 2004:
  - Deaths estimated in excess of 30,000 with thousands still missing and hundreds of thousands displaced.
  - Cost of replacing damaged infrastructure estimated at about $1.5-1.6 billion (7½ percent of GDP).
  - Overall damage estimated around $1 billion (4½ percent of GDP); needed upgrades increase reconstruction costs to $1.5–1.6 billion.
- Preliminary sectoral estimated reconstruction costs (in millions of U.S. dollars):
  - Housing: 437-487
  - Roads: 200
  - Water supply and sanitation: 117
  - Railways: 130
  - Education: 45
  - Health: 84
  - Agriculture: 4
  - Fisheries: 118
  - Tourism: 130
  - Power: 67-77
  - Other (private assets, etc.): 168-208
  - Total (US$ millions): 1,500-1,600
- Fund request and program context:
  - Authorities requested a purchase of SDR 103.35 million (25 percent of quota) under the Fund’s policy for emergency assistance related to natural disasters, and requested subsidies to reduce the rate of charge to concessional terms consistent with PRGF-eligible country policy.
  - A preliminary damage and needs assessment by ADB, JBIC, and World Bank expected to be finalized in April 2005.
  - Three-year arrangements under the PRGF/EFF amount to $567 million; only first disbursements upon approval have taken place thus far.

### Economic performance in 2004 (key findings)
- GDP growth:
  - Growth maintained at 5¼ percent in 2004, compared with 6 percent in 2003.
- Inflation:
  - Inflation rose sharply to 13¾ percent (y/y) at end-2004, compared to 5 percent a year earlier.
- Fiscal outcomes:
  - Fiscal deficit estimated at 8¼ percent of GDP, 1½ percent of GDP higher than the budget target.
  - Public sector debt increased in 2004 to 108 percent of GDP.
  - Net domestic financing of the budget rose to 6 percent of GDP; half provided by the central bank.
  - Authorities borrowed $250 million in domestic commercial foreign currency borrowing to fill the 2004 budget gap.
- Monetary aggregates and interest rates:
  - Growth rates of main monetary aggregates in 2004 close to 20 percent (central bank targets around 15 percent).
  - Central bank increased interest rates by 50 basis points in November 2004; repo and reverse repo rates at 7½ percent and 9 percent respectively.
- External sector:
  - External current account deficit widened to about 3 percent of GDP in 2004 from near balance in 2003.
  - Non-oil imports increased by 16¾ percent in 2004.
  - Rupee depreciated by more than 8 percent vis-à-vis the U.S. dollar in 2004.
  - Gross official reserves fell by $320 million to $1.8 billion (about 2 months of imports) during 2004.
- Structural reforms:
  - Plans to create a Revenue Authority abandoned; an alternative being developed.
  - Privatization of the state-owned People’s Bank will no longer be pursued; government prepared a restructuring plan envisaging recapitalization with public funds.

### Near-term outlook and authorities’ response (2005)
- Growth and inflation outlook:
  - Authorities project GDP growth for 2005 to be maintained at 5¼ percent.
  - Inflation projected to remain at double digit levels (y/y) for most of the year before declining to 8½ percent by end-2005.
- Tsunami impacts and reconstruction timing:
  - Adverse impact on fisheries and tourism would depress GDP growth by about 1–1½ percentage points.
  - Authorities expect up to 40 percent of planned reconstruction to take place in 2005; rehabilitation and reconstruction will take at least three years.
- Immediate policy measures announced by authorities:
  - Provide adequate liquidity to ensure smooth functioning of financial markets and payment/settlement systems.
  - Set up a special refinance loan scheme to assist small and medium enterprises affected by the tsunami, with loans through recognized financial institutions for 3–8 years at a concessionary rate; resources from revolving credit guarantee fund accounts maintained by the central bank on behalf of the government.
  - Announce temporary transfers to affected households of $50 per family per month; if maintained for remainder of 2005, cost estimated about 0.2 percent of GDP.
  - Develop comprehensive rehabilitation and reconstruction plans.
- Fiscal and financing implications:
  - Total government expenditure expected to increase by about 2 percent of GDP on account of tsunami-related spending.
  - Authorities expect these expenditures to be financed by additional aid flows in grants and concessional loans; no plans to issue U.S. dollar-denominated bonds at commercial rates in 2005.
  - Additional post-tsunami aid estimated at about $500 million, which should allow total domestic financing to be kept within the budgeted figure of 4½ percent of GDP.
  - Staff view: additional measures equivalent to about 1¼ percent of GDP would still be required to meet budget targets.
  - Any debt relief would be additional to the aid flows identified.
- Balance of payments and reserves:
  - Additional import needs estimated at $590 million compared with a pre-tsunami scenario.
  - Because some aid will be grants, increase in current account deficit (2 percent of GDP) will be somewhat less than in the trade balance.
  - Taking into account projected aid flows, including requested disaster assistance from the Fund, international reserves projected to increase marginally to $2.0 billion (2¼ months of imports) by end-2005.
  - Projected aid flows in 2005 identified: $80 million in grants from Japan; $150 million ($30 million in grants) from the World Bank; $35 million ($10 million in grants) from the Asian Development Bank; $23 million in grants from India; and $20 million in grants from the United States. Any Paris Club debt relief would be additional.

### Ability to service obligations to the Fund
- Authorities requested a purchase of SDR 103.35 million under the Fund’s emergency assistance policy to support international reserve position against disaster-related import needs.
- In line with Fund policy for PRGF-eligible countries, authorities requested subsidies to reduce the rate of charge to concessional terms.

### Staff appraisal and policy recommendations (Executive Summary)
- Staff supports the authorities’ request under the Fund’s policy on emergency assistance for natural disasters.
- Key challenges and priorities recommended:
  - Manage demand pressures carefully given local capacity constraints with large reconstruction expenditure planned for 2005.
  - Closely monitor disbursement and use of aid flows to ensure accountability and transparency to sustain aid flows over time.
  - Support temporary debt relief from creditors that can provide it; temporary debt relief in line with the January 12–13 Paris Club offer would provide additional protection to fiscal and external positions and limit near-term downside risks.
  - Continue to pursue medium-term reform objectives consistent with targets set in the Fiscal Management (Responsibility) Act to preserve debt sustainability.
- Monetary and credit program for 2005:
  - Authorities’ monetary program envisages broad money growth of 15 percent to support growth while beginning to bring inflationary pressures under control.
  - Program would allow private sector credit to increase by 18 percent.

### Box 1 — Sri Lanka and the Paris Club (debt profile, service, and staff recommendations)
- Paris Club engagement and context:
  - Sri Lanka has never gone to the Paris Club for a debt rescheduling.
  - Concerns about implications for debt rating and market access; most Paris Club debt is to Japan.
  - Out of total external debt of about $9 billion, $4 billion is bilateral (nearly all to Paris Club countries) with $2.6 billion to Japan.
  - January 12–13 Paris Club meeting announced possibility of temporary relief for debt payments; terms not announced. Paris Club indicated they would not expect debt payments from affected countries that request forbearance, subject to creditor national laws.
- Debt levels and composition (Sri Lanka: Structure of Government Debt, end-2004 1/):
  - Total debt: 108.1 percent of GDP
  - Domestic: 57.9 percent of GDP
  - External: 50.2 percent of GDP
    - Bilateral: 23.6 percent of GDP
      - Paris Club: 22.2 percent of GDP
        - Japan: 15.3 percent of GDP
        - United States: 2.9 percent of GDP
        - Germany: 2.7 percent of GDP
      - Non-Paris Club: 1.4 percent of GDP
    - Multilateral: 24.0 percent of GDP
      - ADB: 11.8 percent of GDP
      - World Bank: 11.5 percent of GDP
      - Other: 0.7 percent of GDP
    - Other (commercial banks): 2.6 percent of GDP
  - 1/ Excludes debt to the IMF.
- Estimated government external debt service (Payments in 2005 1/):
  - Total external debt service (2005 budget, excluding IMF): 2.8 percent of GDP
  - External debt service to the Paris Club: $323 million (about 1½ percent of GDP)
  - Interest, Amortization, Total (In millions of U.S. dollars)
    - Bilateral: Interest 111.9, Amortization 232.5, Total 344.4
    - Paris Club: Interest 106.1, Amortization 216.5, Total 322.6
      - Japan: Interest 77.5, Amortization 147.6, Total 225.1
      - United States: Interest 16.5, Amortization 26.6, Total 43.0
      - Germany: Interest 9.1, Amortization 25.5, Total 34.6
    - Non-Paris Club: Interest 5.8, Amortization 16.0, Total 21.8
    - Multilateral: Interest 45.3, Amortization 87.3, Total 132.6
    - Other (Commercial Banks): Interest 12.7, Amortization 54.4, Total 66.8
    - Total: Interest 169.9, Amortization 373.9, Total 543.8
  - 1/ Excludes debt service to the IMF.
- Staff assessment and recommendations (Box 1):
  - Temporary moratorium on debt service would help contain fiscal pressures; Paris Club indicated willingness to consider temporary relief/forbearance, subject to creditor laws and requests.
  - Humanitarian relief and reconstruction expenditures planned for 2005 and succeeding years are appropriate; staff supports mobilizing donor assistance on concessional terms given the scale of the tragedy and Sri Lanka’s high debt burden.
  - Authorities to monitor aid flows and develop frameworks/mechanisms for recording, reporting and accounting for assistance.
  - Authorities should be mindful of implementation capacity limits and potential inflationary pressures; may need to increase interest rates in 2005 to meet monetary and inflation objectives.
  - Emphasize governance, accountability, and audit arrangements for donor assistance.
  - Resume PRGF/EFF discussions as soon as feasible; original medium-term objectives remain valid.

### Section 24 — Staff supports emergency purchase request (detailed)
- Staff supports purchase under Fund’s emergency assistance policy to facilitate needed imports and avoid depleting reserves, pending resumption of PRGF/EFF-supported program.
- Staff supports authorities’ request for emergency assistance on concessional terms—subject to availability of subsidy resources—in amount of SDR 103.35 million.
- Authorities’ tsunami impact and reconstruction needs (staff summary):
  - Human toll (authorities): over 31,000 dead; over 15,000 injured; 5,600 still missing; hundreds of thousands displaced.
  - Asset losses estimated at least around US$900 million (slightly over 4 percent of GDP).
  - Total reconstruction expenditure estimated around US$1.5 billion, with a reconstruction program projected to take around 2–3 years.
  - Major reconstruction components (authorities’ estimates):
    - Housing and townships: (part of US$1.5 billion total)
    - Transportation infrastructure (roads, railways, ports): US$400 million
    - Fisheries sector infrastructure: US$200 million
    - Water supply and sanitation projects: US$150 million
    - Schools and hospitals building: US$120 million
  - Reconstruction strategy: multi-hazard risk approach; provisions for coast conservation and natural resources.
- Fiscal impact and financing needs for 2005:
  - Government estimate of total fiscal cost in 2005: about 2¼ percent of GDP (mostly development expenditure).
  - Expected minor revenue shortfalls: about ¼ percent of GDP.
  - Projected fiscal deficit for 2005: about 9¾ percent of GDP compared to 7½ percent envisaged in the 2005 budget.
  - Government plans: seek donor grants and concessional loans; do not envisage financing on commercial terms.
  - Formal Fund request: purchase equivalent to SDR 103.35 million (25 percent of quota) with subsidies to reduce rate of charge to concessional terms for PRGF-eligible countries.
  - Government expects to meet additional expenditure out of donor assistance; Paris Club external debt relief could provide fiscal space.
- Macroeconomic and balance of payments effects:
  - Negative impact on GDP growth limited by initiation of rehabilitation and reconstruction; reconstruction activity will support demand.
  - External current account deficit estimated to increase by about 2 percentage points of GDP due to lower tourism receipts and higher reconstruction imports, despite likely increase in remittances.
  - Official reserves at end-2005 likely sufficient to finance about 2½ months of imports even with expected increase in external aid.
  - Risks: volatile oil prices and adverse impact from phasing out the MFA.
- Specific figures from staff tables and annexes:
  - Nominal GDP (2003): US$18.2 billion
  - Population (2003): 19.3 million
  - GDP per capita (2003): US$947
  - Quota: SDR 413 million
  - Gross official reserves (end of period examples, millions of U.S. dollars): 1,231; 1,566; 2,147; 1,825; 1,886; 1,977
  - Net international reserves examples (millions of U.S. dollars): 1,780; 1,568; 1,783; 1,601
  - Current account balance examples (millions of U.S. dollars): -179; -236; -76; -626; -689; -1,161
  - Current account balance (percent of GDP) examples: -1.1; -1.4; -0.4; -3.2; -3.2; -5.3

### Supplement — Recent developments, direct BOP impact, identified financing, and decisions (staff supplement and press release)
- Recent economic developments (as of supplement):
  - Monetary Policy Board left interest rates unchanged in February to facilitate rehabilitation/reconstruction spending.
  - Exchange rate: around Rs. 99.5 per U.S. dollar.
  - Gross official reserves: $1.8 billion as of February 23, about $30 million below pre-tsunami and end-2004 levels.
  - Tourist arrivals: January fell by 35 percent compared to last year.
  - Inflation: Colombo CPI increased by 16 percent (y/y) in February.
- Direct balance of payments impact and identified financing (2005):
  - Estimated direct BOP impact of tsunami in 2005: $720 million.
  - Identified direct financing: $308 million, including World Bank credit of $75 million approved on February 24.
  - Components of direct impact (U.S. dollars, in millions):
    - Additional imports for reconstruction/relief: 630
    - Additional service charges on imports: 20
    - Reduction in service receipts from tourism: 110
    - Less: Lower tourism related imports: 40
    - Total direct impact on the balance of payments: 720
  - Identified financing (millions):
    - Grants: 163
      - Multilateral: 40
      - Bilateral: 123
    - Loans: 145
      - Multilateral: 145
      - Bilateral: --
    - Identified financing total: 308
  - Remaining financing need: 1/412
    - 1/ Expected to be financed by private sector flows, IMF assistance, additional donor funds and/or debt relief.
  - Role of IMF emergency assistance: intended to facilitate needed imports and avoid depletion of reserves during first difficult months.
- Debt relief and creditor actions:
  - G-7 creditors agreed to defer debt payments up to end-2005 for countries that request it.
  - Sri Lanka contacted creditors and suspended debt service payments to G-7 creditors by end-February.
  - Potential savings if debt payments to all G-7 creditors suspended from March onwards: about $294 million in debt service in 2005, of which $207 million is to Japan.
  - Terms and conditions of deferral still being discussed.
  - Meeting on financing needs beyond 2005 scheduled in Sri Lanka during May 16–17.
- Risks and oil price sensitivity:
  - Downside risks: removal of global textile quotas; uncertainty over oil prices.
  - Staff report BOP projections assumed average oil price of $40½ per barrel.
  - Using WEO forecast average of $46½ per barrel would increase projected oil import bill by $190 million.
- Government reconstruction and governance actions:
  - Discussions with Tamil leaders on framework for reconstruction in North and East, including regional allocation of aid, delegation of execution to lower levels, and broad consultations.
  - Follow-up measures: grant scheme for affected individuals; concessional loan program for SMEs; development of rehabilitation and reconstruction plan.
  - Authorities intend to keep domestic financing of the budget at pre-tsunami level; contain money growth; work on framework to monitor disbursement and use of aid.
- IMF emergency assistance decision (press release highlights):
  - IMF Executive Board approved SDR 103.35 million (about US$157.5 million) in emergency assistance for Sri Lanka.
  - Amount approved available immediately to help government deal with tsunami effects of December 26, 2004.
  - Human toll cited: 31,000 people dead, 6,000 still missing, and hundreds of thousands displaced.
  - Estimated cost of replacing damaged infrastructure: US$1.5–1.6 billion, or 7½ percent of GDP.
  - Growth outlook: GDP growth in 2005 estimated at 5¼ percent.
  - Repayment terms: repaid in eight equal quarterly installments over 3¼ to 5 years from disbursement date.
  - Rate of charge: subsidized to 0.5 percent per annum for PRGF-eligible countries hit by a natural disaster (subject to resource availability).
  - Press Release No.: 05/52
  - Press Release date: March 4, 2005

*Source: _cr0584 — International Monetary Fund staff report, Box 1, section 24, and staff supplement (Prepared by the Asia and Pacific Department; Approved by Wanda Tseng and Matthew Fisher; March 2, 2005).*

### Executive Summary ......................................................................................................

### Executive Summary

### Background
- The tsunamis of December 26, 2004 caused extensive loss of life and physical damage:
  - Deaths have been estimated in excess of 30,000 with thousands still missing and hundreds of thousands displaced.
  - The cost of replacing damaged infrastructure is estimated at about $1.5-1.6 billion (7½ percent of GDP).
  - Overall damage is estimated to be around $1 billion (4½ percent of GDP), but needed upgrades increase reconstruction costs to $1.5–1.6 billion.
- Preliminary sectoral estimated reconstruction costs (in millions of U.S. dollars):
  - Housing: 437-487
  - Roads: 200
  - Water supply and sanitation: 117
  - Railways: 130
  - Education: 45
  - Health: 84
  - Agriculture: 4
  - Fisheries: 118
  - Tourism: 130
  - Power: 67-77
  - Other (private assets, etc.): 168-208
  - Total (US$ millions): 1,500-1,600
- The authorities requested a purchase in an amount of SDR 103.35 million (25 percent of quota) under the Fund’s policy for emergency assistance related to natural disasters, and requested subsidies to reduce the rate of charge to concessional terms consistent with PRGF-eligible country policy.
- A preliminary damage and needs assessment was undertaken by the Asian Development Bank, the Japan Bank of International Cooperation (JBIC), and the World Bank; the assessment is expected to be finalized in April 2005.
- The three-year arrangements under the PRGF/EFF facilities amount to $567 million; only the first disbursements upon approval have taken place thus far.

### Economic performance in 2004 (key findings)
- GDP growth:
  - Growth maintained at 5¼ percent in 2004, compared with 6 percent in 2003.
- Inflation:
  - Inflation rose sharply to 13¾ percent (y/y) at end-2004, compared to 5 percent a year earlier.
- Fiscal outcomes:
  - Fiscal deficit is estimated to have reached 8¼ percent of GDP, 1½ percent of GDP higher than the budget target.
  - Public sector debt increased in 2004 to 108 percent of GDP.
  - Net domestic financing of the budget rose to 6 percent of GDP (almost double the budget target); half of this was provided by the central bank.
  - To fill the 2004 budget gap the authorities borrowed $250 million in domestic commercial foreign currency borrowing.
- Monetary aggregates and interest rates:
  - Growth rates of main monetary aggregates in 2004 were close to 20 percent (central bank targets were around 15 percent).
  - The central bank increased interest rates by 50 basis points in November 2004; repo and reverse repo rates stand at 7½ percent and 9 percent respectively.
- External sector:
  - External current account deficit widened to about 3 percent of GDP in 2004 from near balance in 2003.
  - Non-oil imports increased by 16¾ percent in 2004.
  - The rupee depreciated by more than 8 percent vis-à-vis the U.S. dollar in 2004.
  - Gross official reserves fell by $320 million to $1.8 billion (about 2 months of imports) during 2004.
- Structural reforms:
  - Plans to create a Revenue Authority were abandoned and an alternative is being developed.
  - Privatization of the state-owned People’s Bank will no longer be pursued; the government prepared a restructuring plan envisaging recapitalization with public funds.

### Near-term outlook and the authorities’ response
- Growth and inflation outlook for 2005:
  - GDP growth for 2005 is projected by the authorities to be maintained at 5¼ percent.
  - Inflation is projected to remain at double digit levels (y/y) for most of the year before declining to 8½ percent by end-2005.
- Tsunami impacts and reconstruction:
  - Adverse impact on fisheries and tourism would depress GDP growth by about 1–1½ percentage points.
  - Authorities expect up to 40 percent of planned reconstruction to take place in 2005; rehabilitation and reconstruction will take at least three years.
- Authorities’ immediate policy measures in response to the tsunami:
  - Providing adequate liquidity to ensure smooth functioning of financial markets and payment/settlement systems.
  - Setting up a special refinance loan scheme to assist small and medium enterprises affected by the tsunami, with loans through recognized financial institutions for 3–8 years at a concessionary rate of interest; resources obtained from revolving credit guarantee fund accounts maintained by the central bank on behalf of the government.
  - Announcing temporary transfers to affected households of $50 per family per month; if maintained for the remainder of 2005, the cost is estimated at about 0.2 percent of GDP.
  - Developing comprehensive rehabilitation and reconstruction plans.
- Fiscal and financing implications:
  - Total government expenditure is expected to increase by about 2 percent of GDP on account of tsunami-related spending.
  - Authorities expect these expenditures to be financed by additional aid flows in the form of grants and concessional loans; no plans to issue U.S. dollar-denominated bonds at commercial rates to finance the budget in 2005.
  - Additional post-tsunami aid is estimated at about $500 million, which should allow total domestic financing to be kept within the budgeted figure of 4½ percent of GDP.
  - Staff’s view is that additional measures equivalent to about 1¼ percent of GDP would still be required to meet budget targets.
  - Any debt relief would be additional to the aid flows identified.
- Balance of payments and reserves:
  - Additional import needs are estimated at $590 million compared with a pre-tsunami scenario.
  - Since some aid will be in grants, the increase in the current account deficit (2 percent of GDP) will be somewhat less than in the trade balance.
  - Taking into account projected aid flows, including requested disaster assistance from the Fund, international reserves are projected to increase marginally to $2.0 billion (2¼ months of imports) by end-2005.
  - Projected aid flows in 2005 identified include: $80 million in grants from Japan; $150 million ($30 million in grants) from the World Bank; $35 million ($10 million in grants) from the Asian Development Bank; $23 million in grants from India; and $20 million in grants from the United States. Any Paris Club debt relief would be additional.

### Ability to service obligations to the Fund
- The authorities requested a purchase of SDR 103.35 million under the Fund’s emergency assistance policy; the purchase would support the authorities’ international reserve position in the face of sharp disaster-related import needs.
- In line with Fund policy for PRGF-eligible countries, the authorities requested subsidies to reduce the rate of charge to concessional terms.

### Staff appraisal and policy recommendations
- Staff supports the authorities’ request under the Fund’s policy on emergency assistance for natural disasters.
- Key challenges and recommended priorities:
  - Manage demand pressures carefully in view of local capacity constraints given large reconstruction expenditure planned for 2005.
  - Closely monitor disbursement and use of aid flows to ensure accountability and transparency to sustain aid flows over time.
  - Support temporary debt relief from creditors that can provide it; temporary debt relief in line with the January 12–13 Paris Club offer would provide additional protection to fiscal and external positions and limit near-term downside risks.
  - Continue to pursue medium-term reform objectives consistent with targets set in the Fiscal Management (Responsibility) Act to preserve debt sustainability.
- Monetary and credit program for 2005:
  - Authorities’ monetary program envisages broad money growth of 15 percent to support growth while beginning to bring inflationary pressures under control.
  - This program would allow private sector credit to increase by 18 percent.

*Source: _cr0584 - Executive Summary*

### Box 1. Sri Lanka and the Paris Club

### Box 1. Sri Lanka and the Paris Club

### Paris Club engagement and context
- Sri Lanka has never gone to the Paris Club for a debt rescheduling.
- Concerns include implications for their debt rating and access to market financing; these concerns are likely to continue to be a concern of the authorities.
- Most of Sri Lanka’s Paris Club debt is to Japan.
- Out of total external debt of about $9 billion, $4 billion is bilateral (nearly all to Paris Club countries) with $2.6 billion to Japan.
- During the January 12–13 Paris Club meeting, the possibility of temporary relief for debt payments was announced.
  - Terms of any deferral in debt payments were not announced.
  - The Paris Club indicated that—subject to the national laws of the creditor countries—they would not expect debt payments from affected countries that request such forbearance.
- The Sri Lankan authorities are seeking more information from creditor countries on the terms of possible debt relief by the Paris Club.

### Debt levels and composition (Sri Lanka: Structure of Government Debt, end-2004 1/)
- Total debt: 108.1 percent of GDP
- Domestic: 57.9 percent of GDP
- External: 50.2 percent of GDP
  - Bilateral: 23.6 percent of GDP
    - Paris Club: 22.2 percent of GDP
      - Japan: 15.3 percent of GDP
      - United States: 2.9 percent of GDP
      - Germany: 2.7 percent of GDP
    - Non-Paris Club: 1.4 percent of GDP
  - Multilateral: 24.0 percent of GDP
    - ADB: 11.8 percent of GDP
    - World Bank: 11.5 percent of GDP
    - Other: 0.7 percent of GDP
  - Other (commercial banks): 2.6 percent of GDP
- 1/ Excludes debt to the IMF.

### Estimated government external debt service (Payments in 2005 1/)
- Total external debt service (2005 budget, excluding IMF): 2.8 percent of GDP
- External debt service to the Paris Club: $323 million (about 1½ percent of GDP)

- Interest, Amortization, Total (In millions of U.S. dollars)
  - Bilateral: Interest 111.9, Amortization 232.5, Total 344.4
  - Paris Club: Interest 106.1, Amortization 216.5, Total 322.6
    - Japan: Interest 77.5, Amortization 147.6, Total 225.1
    - United States: Interest 16.5, Amortization 26.6, Total 43.0
    - Germany: Interest 9.1, Amortization 25.5, Total 34.6
  - Non-Paris Club: Interest 5.8, Amortization 16.0, Total 21.8
  - Multilateral: Interest 45.3, Amortization 87.3, Total 132.6
  - Other (Commercial Banks): Interest 12.7, Amortization 54.4, Total 66.8
  - Total: Interest 169.9, Amortization 373.9, Total 543.8
- 1/ Excludes debt service to the IMF.

### Staff assessment and policy recommendations
- Temporary moratorium on debt service:
  - Would help contain fiscal pressures.
  - Paris Club indicated willingness to consider temporary relief/forbearance, subject to creditor national laws and individual country requests.
- Aid and reconstruction financing:
  - Humanitarian relief, rebuilding livelihoods, and reconstruction expenditures planned for 2005 and succeeding years are appropriate; staff supports mobilizing donor assistance.
  - Given the scale of the tragedy and Sri Lanka’s already high debt burden, it would be important for assistance to be provided on concessional terms.
  - Authorities have indicated intention to monitor aid flows carefully and are developing frameworks and mechanisms for recording, reporting and accounting for assistance.
- Macroeconomic and monetary policy:
  - Authorities should be mindful of limits to implementation capacity and potential inflationary pressures as reconstruction proceeds.
  - Likely need to be prepared to increase interest rates in the course of 2005 to meet monetary policy and inflation objectives.
  - Important to closely monitor the impact of recent events on the banking system, including on relevant prudential indicators.
- Governance, accountability, and monitoring:
  - Emphasized importance of closely monitoring disbursement and use of aid flows to ensure accountability and transparency, and to minimize temporary fluctuations in the exchange rate.
  - Monitoring mechanisms should include specific audit arrangements to ensure adequate accountability for the use of donor assistance.
- PRGF/EFF program engagement:
  - Authorities intend to resume discussion on the PRGF/EFF-supported program, but it may be some time before they can do so due to the need to focus on disaster relief and reconstruction planning.
  - Original medium-term objectives of the PRGF/EFF program—supporting sustained growth and poverty reduction through private sector development, fiscal consolidation, financial sector reform, and improved public sector performance—remain valid.
  - Staff encourages the authorities to pursue a resumption of the PRGF/EFF arrangements as soon as feasible.

*Source: _cr0584 - Box 1. Sri Lanka and the Paris Club*

### 24.      Staff supports the request for a purchase under the Fund’s policy on emergency

### _cr0584 - 24.      Staff supports the request for a purchase under the Fund’s policy on emergency

### Staff recommendation and conditions
- Staff supports the request for a purchase under the Fund’s policy on emergency assistance for natural disasters to facilitate the needed imports and avoid depleting Sri Lanka’s international reserves, pending the resumption of the PRGF/EFF-supported program.
- The staff supports the authorities’ request for emergency assistance on concessional terms—subject to the availability of subsidy resources—in the amount of SDR 103.35 million.
- The staff welcomes the authorities’ commitment to adhere to a comprehensive medium-term strategy and to cooperate closely with the Fund in developing their reform strategy.

### Scale and composition of tsunami impact and reconstruction needs
- Human toll (as assessed by authorities): over 31,000 people dead; over 15,000 injured; 5,600 still missing; hundreds of thousands displaced.
- Asset losses estimated at least around US$900 million (slightly over 4 percent of GDP).
- Total reconstruction expenditure estimated around US$1.5 billion, with a reconstruction program projected to take around 2–3 years.
- Major reconstruction expenditure components (authorities’ estimates):
  - Housing and townships: (part of US$1.5 billion total)
  - Transportation infrastructure (including roads, railways, and ports): US$400 million
  - Fisheries sector infrastructure (harbours, anchorages and related facilities): US$200 million
  - Water supply and sanitation projects: US$150 million
  - Schools and hospitals building: US$120 million
- Reconstruction strategy: multi-hazard risk approach to reduce future vulnerability; provisions for coast conservation and natural resources.

### Fiscal impact and financing needs for 2005
- Government estimate of total fiscal cost in 2005: about 2¼ percent of GDP, with most reflected in development expenditure.
- Expected minor revenue shortfalls: about ¼ percent of GDP.
- Projected fiscal deficit for 2005: about 9¾ percent of GDP compared to the 7½ percent envisaged in the 2005 budget.
- Government plans and requests:
  - Seek donor grants and concessional loans to finance additional expenditure in 2005; do not envisage financing on commercial terms.
  - Request to Fund: a purchase equivalent to SDR 103.35 million (25 percent of quota) under the Fund’s policy on emergency assistance, with subsidies to reduce the rate of charge to concessional terms in line with policy for PRGF-eligible countries.
  - Government expects to meet additional expenditure out of donor assistance; external debt relief from the Paris Club offer could provide fiscal space.

### Macroeconomic and balance of payments effects
- Impact on GDP growth: overall negative impact limited by initiation of rehabilitation and reconstruction; reconstruction activity will support demand.
- Balance of payments effects:
  - Estimated increase in external current account deficit by about 2 percentage points of GDP due to lower tourism receipts and higher reconstruction-related imports, despite likely increase in remittances.
  - Even with expected increase in external aid, official reserves at end-2005 likely sufficient to finance about 2½ months of imports.
  - Risks identified: volatile oil prices and adverse impact from phasing out the MFA.
- Specific figures from broader staff tables and annexes (as presented in the source):
  - Nominal GDP (2003): US$18.2 billion
  - Population (2003): 19.3 million
  - GDP per capita (2003): US$947
  - Quota: SDR 413 million
  - Gross official reserves (end of period examples): 1,231; 1,566; 2,147; 1,825; 1,886; 1,977 (millions of U.S. dollars) as reported in tables.
  - Net international reserves examples: 1,780; 1,568; 1,783; 1,601 (millions of U.S. dollars).
  - Current account balance examples: -179; -236; -76; -626; -689; -1,161 (in millions of U.S. dollars).
  - Current account balance (in percent of GDP) examples: -1.1; -1.4; -0.4; -3.2; -3.2; -5.3.

### Monetary policy and reserve management stance
- Authorities’ monetary policy target: contain growth rate of the monetary base, the main target, at 15 percent at end of the year.
- The CBSL will continue to maintain exchange rate flexibility.
- Authorities intend to ensure liquidity and smooth functioning of payments and settlements systems; a concessional refinancing scheme for small and medium enterprises initially set at Rs. 5 billion.

### Governance, transparency, and donor coordination commitments
- Government commitment to implement reconstruction strategy with full transparency and accountability; improve communication and community participation; strengthen District-level capacity to coordinate with donors, NGOs, and civil society.
- Plans to improve donor coordination and harmonize procurement practices to ensure efficient implementation.
- Continued pursuit of 2005 budget policy reform agenda: improving tax administration; restructuring and improving management of public enterprises; pursuing fiscal reform in line with the Fiscal Management (Responsibility) Act.
- Government intends to resume Article IV consultation in early May 2005 and resume discussions on PRGF/EFF-supported program issues.

### Key request and Fund policy linkage
- Formal request: purchase from the Fund equivalent to SDR 103.35 million (25 percent of quota) under the Fund’s policy on emergency assistance for natural disasters.
- Request that subsidies be provided to reduce the rate of charge on these resources to concessional terms, consistent with Fund policy for PRGF-eligible countries.
- Staff supports the request subject to availability of subsidy resources and pending resumption of PRGF/EFF-supported program.

*Source: International Monetary Fund — Use of Fund Resources—Request for Emergency Assistance—Supplementary Information (Prepared by the Asia and Pacific Department; Approved by Wanda Tseng and Matthew Fisher; March 2, 2005).*

### 1.      This supplement contains information that has become available since the staff report

### _cr0584 - 1.      This supplement contains information that has become available since the staff report

### Recent economic developments
- Monetary Policy Board left interest rates unchanged in February to facilitate spending on rehabilitation and reconstruction.
- Exchange rate: around Rs. 99.5 per U.S. dollar.
- Gross official reserves: $1.8 billion as of February 23, about $30 million below pre-tsunami and end-2004 levels.
- Tourist arrivals: January fell by 35 percent compared to last year.
- Inflation: Colombo CPI increased by 16 percent (y/y) in February.

### Direct balance of payments impact and identified financing (2005)
- Estimated direct balance of payments impact of the tsunami in 2005: $720 million.
- Identified direct financing: $308 million, including:
  - World Bank credit of $75 million approved on February 24 to finance tsunami reconstruction.
- Components of the direct impact (U.S. dollars, in millions):
  - Additional imports for reconstruction/relief: 630
  - Additional service charges on imports: 20
  - Reduction in service receipts from tourism: 110
  - Less: Lower tourism related imports: 40
  - Total direct impact on the balance of payments: 720
- Identified financing (in millions):
  - Grants: 163
    - Multilateral: 40
    - Bilateral: 123
  - Loans: 145
    - Multilateral: 145
    - Bilateral: --
  - Identified financing total: 308
- Remaining financing need: 1/412
  - 1/ Expected to be financed by private sector flows, IMF assistance, additional donor funds and/or debt relief.
- Role of IMF emergency assistance: request for a purchase under the Fund’s policy of emergency assistance for natural disasters intended to facilitate needed imports and avoid depletion of reserves during the first difficult months.

### Debt relief, creditor actions, and donor coordination
- G-7 creditors agreed to defer debt payments up to end-2005 for countries that request it.
- Sri Lanka contacted individual creditors and suspended debt service payments to G-7 creditors by end-February.
- Potential savings if debt payments to all G-7 creditors are suspended from March onwards:
  - About $294 million in debt service in 2005
  - Of which $207 million is to Japan
- Terms and conditions of debt deferral still being discussed with some creditors.
- A meeting to discuss financing needs, especially for the period beyond 2005, will be held in Sri Lanka during May 16–17.
- Discussions between the government and donors on modalities for monitoring aid flows continue; an agreed framework has not yet been finalized.
- Staff underscores importance of timely realization of donor support and pledges to allow reconstruction without jeopardizing macroeconomic stability.

### Risks to the economic outlook and oil price sensitivity
- Downside risks noted include:
  - Uncertain impact of the removal of global textile quotas.
  - Uncertainty over oil prices.
- Balance of payments projections in the staff report assumed an average oil price of $40½ per barrel.
- Using the latest WEO forecast average oil price in 2005 of $46½ per barrel would increase the projected oil import bill by $190 million.

### Government actions on reconstruction, governance, and fiscal stance
- Government engaged in discussions with Tamil leaders on a framework for tsunami-related reconstruction in the North and East to include:
  - Regional allocation of aid according to need.
  - Delegation of execution to lower levels of government.
  - Broad consultations with affected parties.
- Government follow-up measures include:
  - A grant scheme for affected individuals.
  - A concessional loan program to assist small and medium enterprises.
  - Development of a plan for rehabilitation and reconstruction.
- Authorities intend to:
  - Keep domestic financing of the budget at the pre-tsunami level.
  - Contain money growth.
  - Work with stakeholders on a framework to monitor disbursement and use of aid to enhance transparency and accountability.
- Staff notes limits to implementation capacity and potential inflationary pressures during reconstruction.

### IMF emergency assistance and press release highlights
- IMF Executive Board approved SDR 103.35 million (about US$157.5 million) in emergency assistance for Sri Lanka.
- Approval availability: amount approved is available immediately to help the government deal with the tsunami effects of December 26, 2004.
- Human toll cited: 31,000 people dead, 6,000 still missing, and hundreds of thousands displaced.
- Estimated cost of replacing damaged infrastructure: US$1.5–1.6 billion, or 7½ percent of GDP.
- Growth outlook: GDP growth in 2005 is now estimated at 5¼ percent, the same level as in 2004.
- Repayment terms for emergency assistance: repaid in eight equal quarterly installments over 3¼ to 5 years from the disbursement date.
- Rate of charge: subsidized to 0.5 percent per annum for PRGF-eligible countries hit by a natural disaster (subject to resource availability).
- Press Release No.: 05/52
- Press Release date: March 4, 2005

*Source: IMF staff supplement and Press Release No. 05/52 (March 4, 2005).*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0584.pdf_