Press Release: IMF Executive Board Approves US$2.6 Billion Stand-By Arrangement for Sri Lanka
IMF News, July 24, 2009
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- Published: July 24, 2009
Approval and financing
- The Executive Board approved a 20-month Stand-By Arrangement for Sri Lanka in an amount equivalent to SDR 1.65 billion (about US$2.6 billion).
- Upon approval, an amount equivalent to SDR 206.7 million (about US$322.2 million) becomes immediately available to Sri Lanka. The remaining amount will be phased in, subject to quarterly reviews.
- The total amount of IMF resources made available under the arrangement equals 400 percent of the country’s quota.
- Sri Lanka has a quota of SDR 413.4 million (about US$644.4 million).
Objectives of the authorities’ economic reform program
- Strengthen the country’s fiscal position while ensuring resources for post-conflict reconstruction and relief efforts.
- Rebuild international reserves and strengthen Sri Lanka’s domestic financial system.
- Protect the most vulnerable in the country from the burden of needed economic adjustment.
- Lay a strong macroeconomic foundation to help approach the broader international community for financial support in post-conflict reconstruction.
Executive Board statement highlights (Mr. Takatoshi Kato, Deputy Managing Director and Acting Chairman)
- The global financial crisis significantly impacted Sri Lanka: persistently high budget deficits led to reliance on short-term financing and a subsequent sudden stop in international capital flows.
- Central bank intervention to prevent exchange rate depreciation, combined with a decline in demand for exports, resulted in a significant loss of international reserves; despite a recent rebound in capital inflows, reserves remain very low.
- The IMF-supported program aims to restore fiscal and external viability and address reconstruction needs of conflict-affected areas to support future higher economic growth.
- Reducing the central government fiscal deficit while preserving spending on health and education and protecting the most vulnerable is central to the program.
- Authorities have put in place revenue-enhancing measures and intend to introduce reforms to reduce tax exemptions and broaden the tax base beginning in the 2010 budget.
- Savings on military spending and possible concessional donor financing should help finance reconstruction spending needs.
- The program aims to rebuild reserves to prudent levels while allowing exchange rate flexibility to boost export competitiveness; central bank policies will aim to control inflation while ensuring adequate credit to the private sector.
- The government implemented a plan to recapitalize Seylan Bank and intends to develop a contingency plan for potential stresses in the financial system, and to improve regulation and supervision.
- Mr. Kato noted that the program will require difficult reforms but presents an opportunity to ensure national reconciliation, restore macroeconomic stability, and promote durable growth.
Recent economic developments
- Sri Lanka was hit hard by the global economic and financial crisis; reliance on short-term financing led to a sudden stop of international capital flows.
- Central bank efforts to defend the exchange rate led to a significant loss of reserves; despite a rebound in short-term capital inflows after the end of the conflict, reserves remain low and foreign exchange needs remain acute.
- Economic growth outlook deteriorated: growth of around 3 percent expected in 2009 compared to 6 percent in 2008.
- The financial sector has been put under increasing stress due to the economic slowdown.
- The end of the conflict added policy challenges: reconstruction and humanitarian relief efforts are large undertakings, requiring significant spending priorities while maintaining debt sustainability.
Program summary — key elements
- Fiscal policy:
- Aim: reduce the central government budget deficit to 5 percent of GDP by 2011, from a target of 7 percent of GDP in 2009, in line with the Fiscal Responsibility Act.
- Revenue measures: broaden the tax base, reduce tax exemptions, and improve enforcement.
- Expenditure measures: rationalize expenditures; cuts in military and other expenditures to make room for post-conflict reconstruction and relief spendings.
- Exchange rate and monetary policy:
- Strengthen international reserve position and restore external viability.
- Allow greater exchange rate flexibility to facilitate external adjustment and ensure export competitiveness.
- Social protection:
- Protect expenditures on social transfers for the most vulnerable (with 15 percent of the population living below the poverty line and a large number displaced in the North and East).
- Secure spending on post-conflict humanitarian assistance through savings from spending cuts and external financing and grants from multilateral institutions and the donor community.
- Financial system:
- Strengthen the banking system by improving the regulatory framework and enhancing bank supervision to build confidence in the local financial system.
Selected economic indicators (2006–2011) — key figures preserved as presented
- Real GDP growth:
- 2006: 7.7
- 2007: 6.8
- 2008: 6.0
- 2009 Est.: 3.0
- 2010 Prog.: 5.0
- 2011 Proj.: 6.5
- Inflation (average):
- 2006: 10.0
- 2007: 15.8
- 2008: 22.6
- 2009 Est.: 4.6
- 2010 Prog.: 13.0
- 2011 Proj.: 9.6
- Inflation (end-of-period):
- 2006: 13.5
- 2007: 18.7
- 2008: 14.4
- 2009 Est.: 8.0
- 2010 Prog.: 10.7
- 2011 Proj.: 8.6
- Public finances (in percent of GDP):
- Revenue 2006–2011: 16.3; 14.9; 14.8; 15.4; 16.0
- Expenditure 1/ 2006–2010: 24.3; 23.5; 21.9; 21.5; 21.0
- Central government balance 1/ 2006–2011: -8.0; -7.7; -7.0; -6.0; -5.0
- Consolidated government balance 1/ 2006–2010: -8.2; -8.8; -6.4; -4.9
- Consolidated domestic financing 2006–2010: 5.6; 4.1; 7.1; 4.5; 3.6
- Government debt (domestic and external) 2006–2011: 88.7; 85.8; 81.1; 83.7; 84.4; 81.0
- Money and credit (percent change, end of period):
- Reserve money 2006–2011: 21.2; 10.2; 1.5; 12.0; 13.8; 13.4
- Broad money 2006–2010: 17.8; 16.6; 8.5; 20.2; 20.8
- Domestic credit 2006–2011: 29.5; 18.0; 15.2; 17.3; 10.5; 17.4
- Private sector credit 2006–2011: 24.0; 19.3; 7.9; 10.5; 17.4; 21.4
- Public sector credit 2006–2011: 46.1; 8.9; 46.2; 18.2; 10.9; 9.1
- Balance of payments (in millions of U.S. dollars):
- Exports 2006–2011: 6,883; 7,640; 8,137; 7,098; 7,559; 7,949
- Imports 2006–2011: 10,254; 11,296; 14,009; 10,015; 10,552; 11,368
- Current account balance 2006–2011: -1,500; -1,401; -3,719; -478; -504; -929
- Current account balance (in percent of GDP) 2006–2011: -5.3; -4.3; -9.4; -1.2; -1.3; -2.2
- Export value growth (percent): 11.0; -12.8; 5.2
- Import value growth (percent): 15.7; -28.5; 5.4
- Gross official reserves (end of period) 2/:
- In millions of U.S. dollars 2006–2011: 2,515; 3,063; 1,580; 2,492; 4,110; 4,614
- In months of imports 2006–2009: 2.4; 1.6; 3.7; 4.0
- As a percent of short-term debt 2006–2011: 71; 60; 29; 45; 79
- External debt (public and private):
- In billions of U.S. dollars 2006–2010: 14.2; 16.7; 17.6; 19.1; 19.6
- As a percent of GDP 2006–2010: 50.2; 51.5; 44.4; 43.5; 49.8
- Total stock of public dollar commercial debt 3/ 2006–2010: 1,659; 2,758; 2,658; 2,596; 2,307; 2,275
- As percent of gross official reserves 2006–2010: 66; 90; 168; 104; 56; 49
Other country facts (as presented)
- Main exports (percent of total, 2008): garment (43), tea (16)
- GDP per capita (2008, est.): US$1,972
- Unemployment rate (2008): 5.4 percent
- Poverty rate (2007, incidence): 15.2 percent
- FDI (2008, est.): $691 million
- Public debt (2008): 81.1 percent of GDP
Source: IMF Press Release No. 09/266 (July 24, 2009).