September 27, 2023
PRESS OFFICER: Pinky Vu
Phone: +1 202 623-7100Email: MEDIA@IMF.org
PARTICIPANTS:
Moderator:
HUONG LAN “PINKY” VU
Communications Officer
Panelists:
PETER BREUER
Senior Mission Chief for Sri Lanka
KATSIARYNA SVIRYDZENKA
Deputy Mission Chief for Sri Lanka
SARWAT JAHAN
Resident Representative in Sri Lanka
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MS. VU: Good afternoon, everyone. Welcome to the IMF’s press briefing on the first review mission under the Extended Fund Facility arrangement.
I’m Huong Lan “Pinky” Vu, I'm a Communications Officer at the IMF, and today I'm delighted to be joined by three speakers. Peter Breuer, Senior Mission Chief for Sri Lanka, Katsiaryna Svirydzenka, Deputy Mission Chief for Sri Lanka and Sarwat Jahan, Resident Representative in Colombo.
By now, I think you should have seen the press release that we just posted on our website and I hope that you had some time to digest the details. To begin, I will invite Peter to give some opening remarks and then we'll open the floor for questions. Peter, the floor is yours.
MR. BREUER: Thank you. Good afternoon and thank you for joining us for our press briefing here this afternoon. It's good to be back in Colombo and see you all. As you already know, the IMF team has been here since September 14 th to conduct the first review under the Extended Fund Facility, EFF, arrangement here in Sri Lanka. During this time, we've held constructive and productive discussions with the authorities and other stakeholders, including the private sector and civil society organizations.
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% to today 1.3% and gross international reserves increased by $1.5 billion between March and June this year, and shortages of essentials have eased. But full economic recovery is not yet assured. Growth momentum remains subdued, with real GDP contracting 3.1% in the second quarter this year, on a year on year basis, and high frequency economic indicators still sending mixed signal. Reserve accumulation has slowed in recent months.
In this challenging environment, the authorities have undertaken important steps on monetary and fiscal policies as well as implemented structural reforms to address the ongoing economic crisis. The government has met the program's primary balance targets and remains committed to this important pillar of the program to support their efforts to restore debt sustainability. Key legislations have passed in parliament, including the Central Bank Act and the Anti-Corruption Act, and these 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 aim 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 in regaining debt sustainability through the execution of domestic debt restructuring and with advancing discussions with external creditors.
More work still needs to be done to sustain the reform momentum and put the economy on a path towards lasting recovery and economic growth. For instance, revenue mobilization gains, while improved relative to last year, are expected to fall short of initial projections by nearly 15% by year end, in part due to economic factors. To increase revenues and signal better governance, it will be important to strengthen tax administration, remove tax exemptions and actively eliminate tax evasion.
Discussions are ongoing and the authorities are continuing to make progress on their plans for revenue mobilization targets, anti-corruption efforts and other important structural reforms.
Let me conclude by thanking 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 reiterate our commitment to providing support to Sri Lanka during this challenging time. Thank you.
MS. VU: Thank you, Peter. Now we will open the floor for questions. If you want to ask a question, please raise your hand and we'll give a microphone to you. Please introduce yourself and the organization that you work with.
QUESTIONER: Hi, I'm Sandro from News First. First, Mr. Breuer, my question to you is have you mentioned that the IMF is unsatisfied with the government of Sri Lanka's tax collection system so far?
MS VU: More questions please.
QUESTIONER: Yes. Naila Saleem, Swedish Radio here. I would like to hear your opinion about the work done to secure the situation for the most poor. That was one of the conditions of the IMF, but it seems like people are having a very tough time still.
Ms. VU: I think we get one more question. Marwaan?
QUESTIONER: Yeah. Marwaan Markar of (inaudible). You make references to the Executive Board review subject to adequate progress on finance reviews. This is meaning this means bilateral discussions with external creditors. The president is due to go to China next month, hopefully to win Chinese support for debt restructuring. What if these delays continue and how would that delay impact Sri Lanka's economic recovery? Thank you.
MS. VU: Thank you. I think we'll take this first patch.
MR. BREUER: Thank you for these questions. So as I mentioned, and as we mentioned in the press release, tax collection is a concern in Sri Lanka. It's an important pillar of the program because it's important to sustain the essential expenditures of the government. The government provides important services education, health, infrastructure, support for the poor and vulnerable. And these expenditures need to be sustained with an appropriate amount of revenues. In Sri Lanka, there's a big gap between these two. Expenditures are of the order of 19 or so percent of GDP. Revenue is in the order of 9% of GDP or so, and that gap needs to be filled.
To accomplish that objective, it's important to have appropriate tax policies and tax administration systems in place that support this effort. The reforms in this regard already started last year with significant tax policy reforms that essentially reversed some of the large tax cuts that had taken place in 2019. But that by itself isn't enough for Sri Lanka to bridge that gap that I mentioned and to become to step away from being one of the countries with the lowest tax takes in the entire world. And so discussions in that regard continue to ensure that the objectives of the program can be reached. And you remember that the objective is for in 2024 for Sri Lanka to be able to raise revenue equivalent to 12% of GDP. So there's some way to go to get there next year.
Let me also take the question on debt and then perhaps Sarwat can speak to the second question. So this question was about the financing reviews and engagement with external creditors. So for the IMF program to move to the next step of completing the first review and dispersing the second tranche, two important components are needed. One is to agree with the authorities on a set of policies that they can take forward to achieve the objectives so that we can reach staff level agreement for this first review. And we are very confident that we will be able to do that with a little bit more time to continue the discussions. And then the second leg that needs to be completed is the discussions on the debt. Essentially, what we need is a clear path towards restoring debt sustainability. For the IMF to be able to go ahead, it needs to convince itself that debt sustainability can be restored. And to do that, we need to convince ourselves that there are discussions, negotiations that will result in debt treatments that will essentially be in line with the debt targets that we had set at the beginning of the program in March. When these debt targets can be reached, that is when we assess that debt sustainability can be restored. And so we need to convince ourselves of the path to that direction. Over to Sarwat.
MS. JAHAN: On the question regarding the situation of the poor, I have been in Sri Lanka now for almost a year and I've witnessed how the economic crisis have impacted all Sri Lankans, especially the poor and the vulnerable. And it's oftentimes it is the poor and the vulnerable group that do not have the buffers to go through this crisis. How the IMF program can help? Well, we can help through multiple ways. First is when there is economic stabilization in the economy that means that it's good for all Sri Lankans, including the poor and the vulnerable, because this means that inflation will go down, as it has been during the first six months of the program. And therefore this helps the poor, as we know, because inflation is the worst form of tax.
It also helps through reduced interest rates, and we have seen interest rates also coming down. And then the program that the IMF has designed, the tax that is in place, is actually quite progressive. So the poor and the vulnerable are excluded from it. Only those who are able to pay, do pay. But in addition to this, the one point that I would like to highlight is the IMF program places a lot of importance on social spending. In fact, this is one of the core pillars of the program. Under the program for 2023, we had discussed with the authorities to have a spending floor on four major cash transfers, which would be about Rs187,000,000,000 or equivalent to 0.6% of GDP. And going forward, we'd like to see this minimum social spending to continue into the next year.
MS. VU:: Thank you.
QUESTIONER: Thank you, Indika from the Daily Mirror. As revenue mobilization remains a concern, revenue mobilization remains a concern. So in your discussions with the authorities, how satisfied are you with the plans that they have to address the situation? That's question number one. And the other one is SOE restructuring. Are you happy with the pace at which that is happening at the moment?
QUESTIONER: Sirsa Kannangal (phonetic) from Madhavaram. My question is, is there any opportunity to reconsider this agreement?
MS VU: Which agreement?
QUESTIONER: IMF between government and IMF, because opposition leader always asking for renegotiate the agreement between IMF.
QEESTIONER: Shiharan is from Economy Next. The government has already announced its DDO domestic debt optimization. Are you satisfied with it and do you think EPF alone is enough or do you think they need to go for banking sector as well in the DDO? That's my first question. Second question, when is likely to the second tranche be dispersed if everything goes well.
MS. VU: Thank you.
MR. BREUER: Okay, thank you very much. So, revenue mobilization. So, as I mentioned, there has been a strong effort already considerable reforms have been introduced, but at the same time, unfortunately, there is going to be a shortfall this year. This is partially due to economic factors because as I mentioned, growth is a tad lower than was projected and inflation is significantly less and the exchange rate is a little bit different. So there's a whole host of factors that explain some of the shortfall, but there's also a lot more to be done in terms of continuing with the reform path and also tax administration. And so that really is the area where the discussions are focused on so as to reach the objective of 12% of GDP revenue by the end of next year and avoid a shortfall next year. So we're really looking to the benefits of the tax reforms that were introduced last year to bear full fruit and to be supplemented with appropriate additional reforms. So maybe Katya you can do in a second.
With respect to can the agreement reconsidered or renegotiated? So in principle that's possible. It's of course a big undertaking and indeed we would want to be sure that the objectives of the program can still be achieved. But it does happen that there are little changes to the program where the same objectives can be achieved in different ways. And so indeed, this is sort of what we do on an ongoing basis. For example, during this review, make sure that the policies that were agreed at the beginning are still the appropriate policies or do adjustments need to be made as we go along. So in a way, programs are dynamic and do that all the time anyway.
And then maybe connected to that is the question on the second tranche. So there is no fixed timeline. As I mentioned, we need sort of two important things to be satisfied. We need to have reached agreement on a set of policies and reforms that will allow us to go forward with the understanding that the objectives of the program can be reached. So now we've discovered there was a little bit of a shortfall in one area during this year. So we're looking to try and find ways to address that shortfall and compensate for it. Working in a direction of having agreement on these policies is one important prerequisite. And then the other one is in the area of debt. Is there a stable path towards debt sustainability, reaching agreements with creditors that will help restore debt sustainability in Sri Lanka. And so when these two conditions are met, we can go forward. Of course, there's a little bit of an administrative process. Also it takes us some time to write the report that actually assesses performance for the first review. That's a report that goes through various steps before it's considered by our executive board, which will make the final decision on this and then finally publish that report and share it with the public.
Then there's a question on the domestic debt restructuring and the various elements of it in the country. So from the IMF's perspective, what matters to us is that the debt targets can be reached. Remember, these are the targets with respect to the debt stock and with respect to the flow of debt, the gross financing needs, the debt service on the external side, and also the debt relief that's needed within the program period. And the government, together with their financial and legal advisors, then has to think about how to reach that objective. How can we ask the various creditors to offer relief to us, the government, so that we can comply with these objectives? Now within that, so, the government has chosen a particular way and as you said, the banks are not in there. Now, I should say we care about the targets, but we also care to some extent how we get there in the sense that it's important for us to maintain financial and social stability because otherwise the problem could just become worse and then these targets don't apply anymore. Here in Sri Lanka, I think financial stability is maintained. The banks will nevertheless suffer from the restructuring through their exposure to the government, through domestic foreign exchange instruments as well as external foreign exchange instruments, which is why also financial stability is an important part of the program with its own pillar. But let me stop there. I've spoken quite a bit and Katya can speak about the SOEs.
MS. SVIRYDZENKA: So, on the SOE reform, the objective of the SOE reform is to ensure that SOEs are run on a commercial basis and that they do not accumulate any more additional financial liabilities for the government. So in this area, the authorities are making good progress. For example, they introduced adjustments to the fuel and electricity prices to ensure that SOEs do not accumulate additional losses. And also in the summer, the cabinet approved a comprehensive strategy to address the cross holdings of debt across the various SOEs and these are both steps in the right direction.
QUESTIONER: Ma'am, if I may, a quick follow up question.
MS. VU: I think we have time for one more question.
QUESTIONER: Thank you. My question is now relating to what Mr. Breuer said earlier as well. Now there has been a huge exodus of professionals in Sri Lanka, as you would have noticed. And alongside that, a lot of people, citizens of Sri Lanka, have found it very difficult to handle the tax burden that has been going on because of the reforms. Of course understandable. However, you also mentioned, Mr Breuer, that there has been a gap within the government revenue and the government expenses. With that, do you think that we can expect tax reforms in the very near future?
MS. VU: Yeah, maybe one more over there and then we'll close.
QUESTIONER: Mr. Breuer, can you explain to us what exactly do you mean by progress on this external debt? Has Paris Club and China, everybody got to give some undertaking, or is it partially and the foreign creditor, the private creditors are also there. What is the progress that is needed before the what is the exact progress that you think should be made on the external debt front? Is it Paris club only? Is China needed? Is the private creditors also needed? Do we have to finalize it or is it some interim thing that you have to do? What do you have to do?
MS. VU: Thank you.
MR. BREUER: Thank you. Yes. Is filling the gap of missing tax revenues does mean some reforms are needed in order to increase the tax take. We are fully cognizant of the cost that this implies for the population. And indeed it's not only the taxes right, it's also utility prices. Inflation has left prices very high. The population is affected in so many different ways and it is very burdensome for the average citizen of the country. Essentially, the country is now sort of experiencing the consequences of both policies and shocks that happened in Sri Lanka over the past so many years. These are policies that left the country very vulnerable in particular, you know, a very strong tax cut in 2019, the effects of which were then exacerbated by various shocks in the country. So all this culminated in the crisis that was at its depth in the summer last year when we were here also. And so essentially the population is now being asked to help cover the costs and that is very burdensome. And I understand that.
On the question of what's needed on the debt, really what we need is we conduct something called Financing Assurances Review. This is a process that we have that applies in the case of Sri Lanka to both official creditors, meaning other countries that have lent to Sri Lanka on a bilateral basis as well as commercial creditors, for example, bond holders. And as you know, the government is in discussions with all of these groups. In Sri Lanka's case, the debt is spread around quite a bit externally and domestically. And so what we look for in order to be able to move forward in this debt restructuring case is adequate progress in the negotiations with the creditors that would give us confidence that this process will be concluded in a timely manner and in line with the program's debt targets. So that's really what we're looking for, and it is the executive board's decision at the end of whether and when the IMF will be able to move ahead.
MS. VU: Thank you very much. We have come to the end of our press briefing today. Please note that the recording and transcript will be posted on imf.org very soon. Thank you very much for being here with us today. Thank you.
MR. BREUER: Thank you.
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