Transcript on IMF-supported EFF program Press Briefing for Sri Lanka
IMF News, March 21, 2023
Source details
- Canonical URL
- Transcript on IMF-supported EFF program Press Briefing for Sri Lanka
Other formats
Bibliographic details
- Published: March 21, 2023
Program overview
- IMF Executive Board approved a 48-month extended arrangement under the Extended Fund Facility (EFF) of 2.286 billion SDR, Special Drawing Rights, corresponding to about 3 billion U.S. dollars.
- Sri Lanka will immediately receive an initial disbursement of about $330 from the EFF arrangement.
- The IMF described the EFF support as intended to support Sri Lanka's economic policies and reforms and to catalyze new external financing including from the Asian Development Bank and the World Bank.
- Disbursements after the initial tranche will be tied to reviews every six months.
Five pillars of the reform program (priorities)
- Ambitious revenue-based fiscal consolidation, accompanied by:
- stronger social safety nets,
- fiscal institutional reforms,
- cost recovery-based energy pricing.
- Restoration of public debt sustainability, including through debt restructuring.
- Multi-pronged strategy to restore price stability and rebuild reserves under great exchange rate flexibility.
- Policies to safeguard financial sector stability to enable the financial sector to support economic growth.
- Structural reforms to address corruption vulnerabilities and enhance growth (including an in-depth IMF governance diagnostic).
Debt restructuring: required assurances, targets, and timeline
- The IMF approval requires assurances from official bilateral creditors that they will provide debt relief and/or financing to restore debt sustainability consistent with the program, and that authorities are making good faith efforts to reach a private agreement with private creditors; these requirements were met ahead of the Board meeting.
- Debt treatment targets specified in the memorandum of economic and financial policies (MEFP):
- Debt stock target: reach 95 percent of GDP by 2,032.
- Gross financing needs target: below 13 percent of GDP between 2027 and 2032, on average (down from more than 34 percent of GDP in 2022).
- Central Government annual debt service in foreign currency: below 4.5 percent of GDP in every year between 2027 and 2032 (down from more than 9 percent of GDP in 2022).
- Next steps and timeline:
- Sri Lanka, with legal and financial advisors, is to present a restructuring strategy by the end of April (authorities committed to this by end-April as part of the program).
- Official bilateral creditors have provided specific and credible assurances; commercial creditor engagement proceeds under a good-faith negotiation standard (process-oriented).
Social protection, distributional measures, and tax policy
- Social safety nets:
- The program sets a minimum spending floor on social safety nets: 187 billion rupee for 2023, amounting to 0.6 percent of GDP.
- The program aims to improve coverage and targeting: current coverage is around 40 percent of poor households; around 10 percent of social safety net spending is paid to relatively rich families and should be corrected.
- An important milestone: approval of the welfare benefit payment scheme by mid-2023 (detailed in the structure benchmark table, table two of the MEFP).
- IMF disbursements are not tied to specific spending lines; funds are provided to the government and may be used at the government's discretion.
- Tax policy:
- Tax reforms under the program are designed to be progressive, ensuring greater contributions from higher income earners while protecting the poor and most vulnerable.
- The authorities have introduced a new personal income tax rate schedule as part of the tax package.
- Property tax and wealth transfer tax are envisaged in 2025 (timing reflects preparatory needs such as asset/real estate valuation systems).
Monetary, exchange rate, and reserve policies
- Central Bank reforms:
- Strengthen Central Bank independence to fight inflation and abandon central bank financing of fiscal deficits (monetary financing).
- Commitment to implement flexible exchange rate policy: allow the market to determine the exchange rate with intervention restricted to adverse market conditions.
- Reserve rebuilding and foreign exchange operations:
- The program includes a Central Bank commitment to outright purchases of foreign exchange of US dollars amount of $1.4 billion in 2023 to help rebuild reserves.
- Inflation target under the program (from MEFP Table 1):
- Target inflation band around between 12 percent and 18 percent by end of 2023 with a mid-point of 15 percent.
- If actual inflation is outside this band, consultations with IMF staff or the Executive Board will occur.
Governance, anti-corruption, and diagnostic exercise
- Anti-corruption and governance reforms are a central pillar of the EFF-supported program and considered indispensable to ensure reforms benefit the Sri Lankan people.
- IMF is conducting an in-depth governance diagnostic exercise to:
- examine the severity of corruption,
- identify key governance weaknesses and corruption vulnerabilities,
- assess the adequacy of the anti-corruption framework,
- recommend policies to address vulnerabilities.
- Diagnostic focus areas include fiscal governance, financial sector oversight, Central Bank governance, market regulations, rule of law, and AML/CFT.
- The governance diagnostic mission has started and the report is planned for publication by September 2023.
- Anti-corruption legal commitments:
- Authorities commit to fundamentally improve public financial management and strengthen anti-corruption legal framework in line with the United Nations Convention Against Corruption.
- Commitment to introduce anti-corruption legislation including asset declaration measures near term; asset recovery actions are to be addressed by March 2024.
Implementation, institutions, and safeguards
- Fiscal institutions and public financial management (PFM):
- Program envisages a new PFM law to clarify budget formulation, roles and responsibilities, and revamped fiscal rules.
- Measures include improved commitment control, e-procurement, and improved public investment appraisal to enhance public spending efficiency.
- Import and exchange restrictions:
- Authorities will develop a plan for phased removal of import restrictions, exchange restrictions, and other balance of payments-related restrictions; plan due by June 2023.
- Central Bank and monetary financing:
- Program requires abandonment of monetary financing and increased Central Bank autonomy to support price stability.
- Repayment terms (EFF feature):
- The Extended Fund Facility repayment periods range from 4.5 to 10 years (repayment profile details referenced in MEFP/Table 7).
Key statistics and figures cited in the briefing (verbatim)
- 48-month extended arrangement under the EFF of 2.286 billion SDR (about 3 billion U.S. dollars).
- Initial disbursement: about $330.
- Alternative figure mentioned for disbursement availability: around $303 million worth of SDR (specified by IMF staff as available to government).
- Sri Lanka public debt: 128 percent of GDP as of end 2022.
- Revenue and expenditure examples:
- Revenues around 8.6 percent of GDP (reference); 8.3 percent of GDP in 2021 cited elsewhere in the briefing.
- Expenditures of 19.9 percent of GDP in 2021.
- Primary balance: negative 5.7 percent in 2021 to a projected 2.3 percent of GDP starting in 2025.
- Debt stock target: 95 percent of GDP by 2,032.
- Gross financing needs target: below 13 percent of GDP between 2027 and 2032 (down from more than 34 percent of GDP in 2022).
- Central Government annual foreign-currency debt service target: below 4.5 percent of GDP in every year between 2027 and 2032 (down from more than 9 percent of GDP in 2022).
- Inflation target band by end-2023: between 12 percent and 18 percent (mid-point 15 percent).
- Social safety net minimum spending floor: 187 billion rupee for 2023 (0.6 percent of GDP).
- Social safety net current coverage: around 40 percent of poor households; around 10 percent of payments go to relatively rich families.
- Planned Central Bank foreign exchange purchases: US dollars amount of $1.4 billion in 2023.
- EFF repayment periods: 4.5 to 10 years.
Transcript on IMF-supported EFF program Press Briefing for Sri Lanka, March 21, 2023 — IMF Communications Department