Transcript of IMF Press Briefing in Sri Lanka
IMF News, May 16, 2023
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- Published: May 16, 2023
Global and regional outlook
- 2023 described as a challenging year for the global economy.
- Global growth expected to decelerate and bottom out in 2023.
- Global inflation easing but “remains stubbornly high.”
- Banking strains in the U.S. and Europe have injected greater uncertainty.
- Asia and the Pacific:
- Growth in Asia and the Pacific is projected to increase this year to 4.6 percent up from 3.8 percent in 2022.
- The region would contribute around 70 percent of global growth.
- Growth in the region is expected to fall to 3.9 percent five years out.
- Drivers: recovery in China and resilient growth in India; rest of Asia expected to bottom out in 2023.
- Risks: stickier global and regional price pressures; disconnects about monetary policy paths; potential additional turmoil in global financial markets; adverse spillovers from China’s medium-term slowdown; deeper geo-economic fragmentation.
Sri Lanka: crisis context and program projections
- Sri Lanka has faced a severe crisis due to past policy missteps and back-to-back shocks.
- IMF Executive Board approved a 48-month Extended Fund Facility of about 3 billion U.S. dollars on March 20.
- Financing and disbursements:
- Sri Lanka immediately received an initial disbursement of about $330 from the EFF arrangement.
- The program is a four-year program of 3 billion.
- First tranche was 330 million U.S. dollars.
- The EFF is a floating interest rate facility; IMF staff estimated that over the lifetime of the loan through repayment (up to 2037) it would average out to about 5 percent.
- Macroeconomic projections under the program:
- Economy is expected to contract by 3 percent in 2023.
- Modest growth of 1.5 percent projected in 2024.
- Prospects hinge critically on implementation of the economic reform program.
- IMF mission timeline and engagement:
- IMF staff team led by Peter Breuer is in Sri Lanka and will be in Colombo until May 23rd for regular consultations ahead of the first review mission later this year.
- Expectation that the debt restructuring exercise will be completed by the first review of the program, which is in September or October of this year.
Five pillars of the reform program (as presented)
- 1) Ambitious revenue-based fiscal consolidation:
- Accompanied by stronger social safety nets, fiscal institutional reforms, and cost recovery-based energy pricing.
- 2) Restoration of public debt sustainability:
- Includes a debt restructuring to ensure stable financing of government operations.
- 3) Multi-pronged strategy to restore price stability and rebuild reserves:
- Greater exchange rate flexibility emphasized to alleviate inflation burden and ensure ability to purchase essential goods.
- 4) Policies to safeguard financial sector stability:
- Ensure the financial sector can support economic growth.
- 5) Structural reforms to address corruption, vulnerabilities, and enhance growth:
- Anti-corruption and governance reforms highlighted as imperative.
Debt restructuring, creditor engagement, and IMF role
- Debt restructuring process:
- Authorities negotiating in good faith with private and official creditors.
- Expectation of completion by the first review (September/October).
- Creditor coordination:
- Japan, India, and the Paris Club (Japan as part of Paris Club) formed a creditor committee; China is an observer to this group.
- Authorities engaging private creditors through financial legal advisors.
- IMF role and limits:
- IMF defines the macro framework and debt targets in a program context and ensures any deal is consistent with restoring debt sustainability.
- IMF does not directly define the perimeter of debt, the specific terms of restructuring, or negotiate creditor participation.
- IMF emphasizes the need to consider financial stability when designing restructuring and to avoid spreading uncertainty that elevates interest rates.
Social protection, targeting, and fiscal floors
- Protection of the poor and vulnerable is an important program pillar.
- Social safety nets and monitoring:
- Program includes a floor on social spending to safeguard poor and vulnerable groups.
- In the last budget, government committed to spend about 187 billion rupees on four of the biggest cash transfers.
- Under the program, the floor on social spending is about 0.6 percent of GDP this year.
- The social registry is being developed with World Bank support; it is dynamic and grievance/validation issues should be addressed by authorities.
- Monitoring focus:
- IMF monitors spending on social safety nets (quantitative targets), while design and validation details involve authorities and development partners.
Governance Diagnostic Exercise
- Sri Lanka is the first country in Asia to undergo the IMF Governance Diagnostic Exercise (at the request of authorities).
- Purpose:
- Identify key governance weaknesses and corruption vulnerabilities that are macroeconomically critical.
- Assess adequacy of anti-corruption framework and policies.
- Scope (six key areas):
- Fiscal governance
- Financial sector oversight
- Central bank governance
- Market regulations
- Rule of law
- AML/CFT
- Timing:
- The IMF Governance Diagnostic Report is expected to be published by September this year.
- Outcome:
- Report will lay out recommendations to improve governance and reduce corruption and will be factored into the program going forward.
Financial sector and banking system
- Authorities are conducting surveillance over the financial system to assess asset quality and capitalization.
- IMF has sought comfort from what it has seen so far regarding financial sector stability.
- IMF interest in domestic debt restructuring decisions focuses on ensuring macroeconomic and financial stability and the continued functioning of the domestic financial system.
- IMF has noted that ongoing uncertainty about domestic debt optimization has elevated interest rates; IMF encourages a strategy to resolve uncertainty so interest rates can decline.
Public perception, socio-political considerations, and implementation risks
- Public buy-in and communication:
- IMF acknowledges the need for strong ownership by authorities and broad buy-in from the Sri Lankan people.
- Measures to protect the poor (social spending floor, social registry) aim to build support.
- Political and legal environment:
- IMF is monitoring legal actions and litigation between private creditors and government (e.g., Hamilton Reserve Bank case) but does not comment on ongoing legal disputes.
- Historical context and program durability:
- IMF noted past difficulties: Sri Lanka had 16 previous IMF programs that were not completed.
- Distinction of current program: debt is assessed to be unsustainable and requires debt restructuring plus ambitious reforms.
- Prior actions were met before Board consideration, indicating initial commitment.
- Migration and human capital:
- IMF noted brain drain concerns; reported that over 300,000 people immigrated from Sri Lanka last year.
- IMF hopes proper macroeconomic policies will encourage return and support growth potential.
Mission assessment and next steps
- IMF mission in Colombo through May 23rd to assess:
- Progress on fiscal delivery, reserve buildup, quantitative targets, and structural benchmarks.
- Whether macro framework revisions are needed (macro framework described as a dynamic exercise).
- Decision points:
- IMF staff will provide a more comprehensive assessment at the end of the mission and decide on potential revisions to the macro framework and program monitoring.
- Emphasis:
- The IMF emphasized that implementation is key; the program is an opportunity to restore stability and put Sri Lanka on a sustainable growth path.
Transcript of IMF Press Briefing in Sri Lanka, May 16, 2023 — IMF Communications Department