Opening Remarks for the Press Briefing on the IMF Executive Board Approval of the Extended Fund Facility (EFF) Arrangement for Sri Lanka
IMF News, March 21, 2023
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- Published: March 21, 2023
Overview
- The IMF Executive Board approved a 48-month extended arrangement under the Extended Fund Facility (EFF) of SDR 2.286 billion (about US$3 billion) to support Sri Lanka’s economic policies and reforms (See Press Release No. 23/79).
- Sri Lanka has been facing a severe economic crisis as a result of past policy missteps and economic shocks, with significant impacts on the poor and vulnerable groups and economic costs from delayed access to external financing.
- An initial disbursement of about US$330 million from the EFF arrangement will be made immediately and is expected to catalyze new external financing including from the Asian Development Bank and the World Bank.
Key elements of the EFF-supported reform program
- The reform program is built on strong policy measures and prioritizes:
- An ambitious revenue-based fiscal consolidation, accompanied by stronger social safety nets, fiscal institutional reforms, and cost-recovery based energy pricing to ensure the state’s ability to support all its essential expenditures.
- Restoration of public debt sustainability, including through a debt restructuring to ensure stable financing of the government’s operations.
- A multi-pronged strategy to restore price stability and rebuild reserves under greater exchange rate flexibility in order to alleviate the burden of inflation, particularly on the poor, to foster an environment of investment and growth, and to ensure Sri Lanka's ability to purchase essential goods from abroad.
- Policies to safeguard financial sector stability to ensure that the financial sector can play its key role in supporting economic growth.
- Structural reforms to address corruption vulnerabilities and enhance growth.
Immediate financing and debt treatment
- The Board approval required assurances from official bilateral creditors that they will provide debt relief and/or financing to restore debt sustainability consistent with the program, as well as an assessment that the authorities are making good faith efforts to reach a collaborative agreement with private creditors. These requirements were met ahead of the Board meeting.
- It is important for the Sri Lankan authorities and creditors to closely coordinate and make swift progress towards a debt treatment that restores debt sustainability under the EFF-supported program.
- The President’s recent open letter to official bilateral creditors includes commitments to transparency and comparability of treatment for all external creditors, which should help facilitate coordination.
- Specific creditor assurances noted in the statement:
- Specific and credible financing assurances have been obtained from Paris Club creditors, India, Hungary and the Export-Import Bank of China.
- Consent to IMF financing notwithstanding Sri Lanka’s arrears was obtained from the remaining Chinese official bilateral creditors, Iran, Kuwait, Pakistan and Saudi Arabia.
Social protection, tax policy, and distributional considerations
- The economic impact of the reforms on the poor and vulnerable needs to be mitigated with appropriate measures.
- The authorities committed to strengthen social safety nets, including:
- A minimum spending floor.
- Well-targeted spending through a new Social Registry.
- Establishment of objective eligibility criteria.
- Tax reforms under the program are designed to be progressive, ensuring greater contributions from high-income earners.
- Efforts to increase tax revenues should be pursued in a growth-friendly manner while protecting the poor and most vulnerable.
Monetary policy, reserves, and financial sector stability
- The program emphasizes restoring price stability and rebuilding reserves under greater exchange rate flexibility to alleviate inflation’s burden, foster investment and growth, and ensure the ability to import essential goods.
- Policies to safeguard financial sector stability are prioritized so the financial sector can support economic growth.
Governance and anti-corruption reforms
- Anti-corruption and governance reforms are emphasized as a central pillar of the EFF-supported program and are described as indispensable to ensure the gains from the reforms benefit the Sri Lankan people.
- The authorities committed to fundamentally improve public financial management and strengthen the anti-corruption legal framework in line with the United Nations Convention against Corruption.
- The IMF is conducting an in-depth governance diagnostic exercise to assess corruption and governance vulnerabilities in Sri Lanka and provide prioritized and sequenced recommendations.
- Sri Lanka will be the first country in Asia to undergo a governance diagnostic exercise by the IMF.
- The IMF looks forward to further engagement and collaboration with stakeholders and civil society organizations on governance reforms.
Implementation and next steps
- Sri Lanka has already started implementing these challenging policy actions; it is essential to continue the reform momentum under strong ownership by the authorities and the Sri Lankan people more broadly.
- IMF staff will continue to assist the authorities with creditor coordination in line with the IMF’s policies.
Key statistics and figures
- 48-month extended arrangement
- SDR 2.286 billion (about US$3 billion)
- Initial disbursement of about US$330 million
- Public debt at 128 percent of GDP as of end-2022
Source: Opening Remarks for the Press Briefing on the IMF Executive Board Approval of the Extended Fund Facility (EFF) Arrangement for Sri Lanka, March 21, 2023.