Press Release: IMF Executive Board Approves Three-Year US$1.5 Billion Extended Arrangement under EFF for Sri Lanka

IMF News, June 3, 2016

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Press Release: IMF Executive Board Approves Three-Year US$1.5 Billion Extended Arrangement under EFF for Sri Lanka

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Bibliographic details

• Published: June 3, 2016

Approval and financing

• Executive Board approved a 36-month extended arrangement under the Extended Fund Facility (EFF) equivalent to SDR 1.1 billion (about US$1.5 billion, or 185 percent of quota).
• Arrangement expected to catalyze an additional US$650 million in other multilateral and bilateral loans, bringing total support to about $2.2 billion (over and above existing financing arrangements).
• Immediate disbursement: SDR 119.894 million (about US$ 168.1 million).
• Remainder available in 6 installments subject to quarterly reviews.

Purpose and strategic focus of the program

• Aim: meet balance of payments needs from a deteriorating external environment and pressures pending macroeconomic policy adjustment; provide a policy anchor for macroeconomic stability and structural reforms.
• Key objectives:
  • Implement a structural increase in revenues to facilitate reduction in the fiscal deficit.
  • Reverse the decline in central bank foreign exchange reserves.
  • Reduce public debt relative to GDP and lower Sri Lanka’s risk of debt distress.
  • Enhance public financial management and improve operations of state owned enterprises.
  • Transition toward inflation targeting with a flexible exchange rate regime.
  • Promote sustainable and inclusive economic growth.
• Program organized under six reform pillars:

(i) Fiscal consolidation; (ii) Revenue mobilization; (iii) Public financial management reform; (iv) State enterprise reform; (v) Transition to flexible inflation targeting under a flexible exchange rate regime; and (vi) Reforms in the trade and investment regime.

Policy priorities and recommendations (from Deputy Managing Director statement)

• Return to fiscal consolidation targeting a reduction in the overall fiscal deficit to 3.5 percent of GDP by 2020.
• Rebuild tax revenues through comprehensive reform of tax policy and administration.
• Strengthen expenditure control and move state enterprise operations toward more commercial footing.
• Commit to exchange rate flexibility to adjust to a shifting external environment, enable rebuilding of foreign exchange reserves, and allow the central bank to focus on price stability.
• Promote greater role for market forces, outward orientation, and comprehensive trade reform to boost competitiveness and attract investment.

Recent economic developments (2015 and context)

• Real GDP growth: 4.8 percent in 2015 (broadly unchanged from 2014).
• Growth drivers: strong services (particularly tourism), continued agriculture growth, positive but declining contribution from manufacturing.
• Sectors slowing: negative growth in construction and weaker growth in manufacturing indicative of slowdown in public and private investment.
• Economy estimated to be operating slightly below potential.
• Unemployment rate: 4.3 percent in end 2015.
• Government fiscal deficit: expanded to 6.9 percent of GDP in 2015.
  • Revenue increased by 1.5 percentage points to 13.1 percent of GDP (mostly one-off measures and temporary vehicle import surge).
  • Expenditures rose by 2.1 percentage points to 19.9 percent of GDP (post-election wage hike, higher interest bill, additional spending on goods and services, increased income transfers).
• Current account deficit: contained at 2.5 percent of GDP in 2015 (same level as 2014).
• Balance of payments deterioration driven by:
  • Foreign exit from government securities.
  • Lower FDI inflows.
  • Slow implementation of externally financed public and private projects.
  • Worsened investor sentiment amid global market volatility and concern over domestic policies.
• External pressures magnified by domestic imbalances and higher volatility around the January and August 2015 elections and the November 2015 official budget.
• Rupee under downward pressure largely due to capital flow developments.
• Foreign exchange and government bond markets were volatile in March 2016, highlighting rigidities.

Key projections and selected indicators (2014–20 from annex)

• GDP and inflation (in percent)
  • Real GDP growth: 2014: 4.9; 2015: 4.8; 2016: 5.0; 2017: 5.2; 2018: 5.4.
  • Inflation (average): 2014: 3.3; 2015: 0.9; 2016: 4.1; 2017: 5.3; 2018: 5.1.
  • Inflation (end-of-period): 2014: 2.1; 2015: 2.8.
  • Core inflation (end-of-period): 2014: 3.2; 2015: 4.5; 2016: 4.3.
• Savings and investment (in percent of GDP)
  • National savings: 2014: 24.5; 2015: 25.9; 2016: 26.9; 2017: 26.0; 2018: 26.2; 2019: 25.7.
  • Government (savings): 2014: -1.1; 2015: -2.1; 2016: -0.9; 2017: 0.2; 2018: 1.4; 2019: 1.7; 2020: 2.2.
  • Private (savings): 2014: 25.6; 2015: 28.0; 2016: 27.8; 2017: 24.8; 2018: 24.2; 2019: 23.6.
  • National Investment: 2014: 27.0; 2015: 28.4; 2016: 28.3; 2017: 28.8; 2018: 29.3; 2019: 29.2.
  • Savings-Investment balance: 2014: -2.5; 2015: -1.5; 2016: -2.8; 2017: -3.1; 2018: -3.3; 2019: -3.4.
• Public finances (in percent of GDP)
  • Revenue and grants: 2014: 11.5; 2015: 13.1; 2016: 13.0; 2017: 14.0; 2018: 15.3; 2019: 15.5; 2020: 15.8.
  • Expenditure: 2014: 17.8; 2015: 19.9; 2016: 18.4; 2017: 18.8; 2018: 19.3; 2019: 19.2.
  • Primary balance: 2014: -2.2; 2015: -0.8; 2016: 0.0; 2017: 0.7; 2018: 0.8; 2019: 1.0.
  • Central government balance: 2014: -6.2; 2015: -6.9; 2016: -5.4; 2017: -4.7; 2018: -4.0; 2019: -3.7; 2020: -3.5.
  • Central government net domestic financing: 2014: 3.8; 2015: 2.3; 2016: 1.3.
  • Central government debt: 2014: 70.7; 2015: 76.0; 2016: 77.2; 2017: 75.5; 2018: 73.1; 2019: 68.2.
• Money and credit (percent change, end of period)
  • Reserve money: 2014: 18.3; 2015: 16.5; 2016: 12.0; 2017: 13.5; 2018: 15.0; 2019: 15.6.
  • Broad money: 2014: 13.4; 2015: 10.8; 2016: 15.4; 2017: 15.1; 2018: 15.2.
  • Domestic credit: 2014: 10.5; 2015: 23.5; 2016: 8.5; 2017: 11.7; 2018: 11.8; 2019: 12.5.
  • Credit to private sector: 2014: 8.8; 2015: 25.1; 2016: 10.0; 2017: 14.3; 2018: 14.5.
  • Credit to government: 2014: 12.9; 2015: 21.3; 2016: 7.7; 2017: 7.2.
• Balance of payments (in millions of U.S. dollars)
  • Exports: 2014: 11,130; 2015: 10,505; 2016: 10,456; 2017: 10,942; 2018: 11,838; 2019: 12,664; 2020: 14,093.
  • Imports: 2014: -19,417; 2015: -18,935; 2016: -18,392; 2017: -20,763; 2018: -22,606; 2019: -24,357; 2020: -26,608.
  • Current account balance: 2014: -1,989; 2015: -2,009; 2016: -1,202; 2017: -2,419; 2018: -2,916; 2019: -3,343; 2020: -3,812.
  • Current account balance (in percent of GDP): 2014: -2.5; 2015: -2.5; 2016: -1.5; 2017: -2.8; 2018: -3.1; 2019: -3.3; 2020: -3.4.
  • Export value growth (percent): 2014: 7.1; 2015: -0.5; 2016: 4.6; 2017: 8.2; 2018: 7.0; 2019: 11.3.
  • Import value growth (percent): 2014: 7.9; 2015: -2.9; 2016: 8.9; 2017: 9.2.
• Gross official reserves (end of period)
  • In millions of U.S. dollars: 2014: 8,208; 2015: 7,304; 2016: 7,853; 2017: 9,372; 2018: 11,866; 2019: 13,033; 2020: 13,843.
  • In months of imports: 2014: 3.7.
• External debt (public and private)
  • In billions of U.S. dollars: 2014: 43.0; 2015: 44.8; 2016: 45.9; 2017: 49.0; 2018: 53.4; 2019: 58.4; 2020: 62.4.
  • As a percent of GDP: 2014: 53.8; 2015: 55.1; 2016: 55.8; 2017: 55.9; 2018: 56.3; 2019: 57.1; 2020: 56.5.
• Memorandum item: Nominal GDP (in billions of rupees): 2014: 10,448; 2015: 11,183; 2016: 12,147; 2017: 13,374; 2018: 14,787; 2019: 16,333; 2020: 18,076.

Press Release No. 16/262; June 3, 2016; IMF Communications Department.

References

• Sri Lanka and the IMF
• Press Releases
• PRESS CENTER
• http://www.imf.org/external/country/LKA/index.htm
• https://www.imf.org/en/home