Colombo, Sri Lanka – September 27, 2023: An
International Monetary Fund (IMF) mission team led by Mr. Peter Breuer
and Ms.
Katsiaryna Svirydzenka visited Colombo from September 14 to 27, 2023 to
discuss economic and financial policies to support the approval of the
First Review of the program under the EFF arrangement.
At the end of the mission, Mr. Breuer and Ms. Svirydzenka issued the
following statement:
“The people of Sri Lanka have shown remarkable resilience in the face
of enormous challenges. Sri Lanka has made commendable progress in
implementing difficult but much-needed reforms. These efforts are
bearing fruit as the economy is showing tentative signs of
stabilization. Inflation is down from a peak of 70 percent in September
2022 to below 2 percent in September 2023, gross international reserves
increased by $1.5 billion during March-June this year, and shortages of
essentials have eased. Despite early signs of stabilization, full
economic recovery is not yet assured. Growth momentum remains subdued,
with real GDP in the second quarter contracting by 3.1 percent on a year-on-year basis and
high-frequency economic indicators continuing to provide mixed signals.
Reserve accumulation has slowed in recent months.
“Sustaining the reform momentum is critical to put the economy on a path
towards lasting recovery and stable and inclusive economic growth. The
authorities have met the program’s primary balance targets and remain
committed to this important pillar of the program so as to support their
efforts to restore debt sustainability. However, revenue mobilization
gains--while improved relative to last year--are expected to fall short of
initial projections by nearly 15 percent by year end, in part due to economic factors. The onus of fiscal adjustment would fall on public
expenditure if there were no efforts to recoup this shortfall. This could
weaken the government’s ability to provide essential public services; and
undermine the path to debt sustainability. To increase revenues and signal
better governance, it is important to strengthen tax administration, remove
tax exemptions, and actively eliminate tax evasion.
“Against continued uncertainty, it also remains important to rebuild
external buffers by strong reserves accumulation. Building on the Central
Bank of Sri Lanka’s success in controlling inflation, refraining from
monetary financing will help keep inflation in check. Other challenges
include maintaining cost recovery of electricity pricing.
“The government has made steady progress on structural reforms. Key
legislations passed in Parliament, including the new Central Bank Act and
the Anti-Corruption Act, could improve governance if implemented
effectively. The IMF Governance Diagnostic report would inform future
reform measures to strengthen governance when published. A new welfare
benefit payment scheme was enacted with new eligibility criteria that aims
to improve targeting, adequacy, and coverage of social safety nets. To
ensure financial stability, steps were taken on conducting bank
diagnostics, developing a roadmap for addressing banking system capital and
liquidity shortfalls, and improving the bank resolution framework.
“The authorities have also made headway on regaining debt sustainability
through the execution of the domestic debt restructuring and advancing
discussions with external creditors. As Sri Lanka is restructuring its
public debt which is in arrears, Executive Board approval of the first
program review requires the completion of financing assurances reviews.
These financing assurances reviews will focus on whether adequate progress
has been made with debt restructuring to give confidence that it will be
concluded in a timely manner and in line with the program’s debt targets.
“Discussions are on-going, and the authorities are continuing to make
progress on their plans for revenue mobilization targets,
anti-corruption efforts, and other important structural reforms.
“The IMF team held meetings with President and Finance Minister Ranil
Wickremesinghe, Central Bank of Sri Lanka Governor Dr. P. Nandalal
Weerasinghe, State Minister Mr. Shehan Semasinghe, Chief of Staff to the
President Mr. Sagala Ratnayaka, Secretary to the Treasury Mr. K M Mahinda
Siriwardana, and other senior government and CBSL officials. The IMF team
also met with Parliamentarians, representatives from the private sector,
civil society organizations, and development partners.
“We would like to thank the authorities for the excellent collaboration during the mission. The team will continue its discussions in the context
of the First Review with the goal of reaching a staff-level agreement in
the near term. We reaffirm our commitment to support Sri Lanka at this
difficult time.”
