Transcript of Press Briefing: IMF Executive Board Completion of Second Review for IMF-Supported Program for Sri Lanka
IMF News, December 13, 2023
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- Published: December 13, 2023
Overview
- IMF Executive Board completed the first review under the 48-month Extended Fund Facility with Sri Lanka, providing the country with access to SDR 254 million (about US$337 million).
- Total IMF financial support disbursed so far: SDR 508 million (about US$670 million) out of the total amount of SDR 2.286 billion (about US $3 billion).
- Program objectives: restore macroeconomic stability and debt sustainability, safeguard financial stability, and enhance growth-oriented structural reforms.
- Performance summary: All quantitative performance criteria for end-June were met, except the one on expenditure arrears. All indicative targets were met, except the one on tax revenues. Most structural benchmarks were either met or implemented with delay by end-October 2023.
Macroeconomic performance and projections
- Economy contracted in Q2 by 3.1%.
- Projected full-year 2023 GDP decline: 3.6%.
- Projected growth for next year: positive growth of 1.8.
- Noted signs: rapid disinflation, significant revenue-based fiscal adjustment, and reserves build-up.
Fiscal stance, revenue mobilization, and taxation
- Sri Lanka’s revenue in 2022: 8.3% of GDP; comparator average in emerging market countries: just above 26%.
- VAT increase discussed as a second-best measure to raise revenues; recognition that VAT is not optimal and medium-term move toward more progressive taxation is desirable.
- Revenue administration reforms highlighted:
- Introduction of key performance indicators related to tax administration (payments and filings, reporting and registrations of taxpayer assets).
- Creation of subunits in the Internal Revenue Department targeting high net worth individuals and monitoring tax indicators.
- Property tax:
- Identified as an important revenue measure for 2025; requires property registry and valuation systems.
- IMF has provided technical assistance on property tax design.
Social protection and distributional safeguards
- Program includes measures to mitigate impact on poor and vulnerable populations.
- Minimum social protection spending floor:
- Last year: about ₹187 billion.
- 2024 budget: about ₹205 billion.
- This amounts to around 2.6 - 2.7% of GDP.
- Essential items exempted from VAT include fruits, vegetables, rice, flour and wheat flour.
- Emphasis on better targeting, coverage, and accuracy via the dynamic Social Registry.
Financial sector stability, bank recapitalization, and central bank recap
- Domestic debt operation converted CBS holdings of T-bills into longer-term T-bonds; valuation at market-determined yield curve reduces net present value and affects central bank equity.
- Program space allocated for central bank recapitalization: about 1.5% of GDP.
- Bank recapitalization in program:
- Program allocated about 6% of GDP in terms of bank recapitalization.
- Size of the current tranche provided following the board meeting: about .5% of GDP.
- Crisis Management Committee developed a recapitalization plan for the five largest banks, incorporating AQR findings, forward-looking loan performance, impact of net open positions, and restructuring effects.
- Expectation: largest banks to raise additional capital from the government; private banks may raise capital on their own.
- IMF financing provided as budget support; allocation of funds for recapitalization is a government decision. Program creates buffers so government can borrow to make equity injections in banks.
Debt restructuring, creditor engagement, and implementation risks
- Sri Lanka reached agreements-in-principle with the Official Creditors Committee and the Export-Import Bank of China on debt treatments; these are reported as consistent with program targets.
- Next steps: convert agreements-in-principle into Memoranda of Understanding and sign firm agreements; reach resolution with external private (commercial) creditors.
- IMF staff will assist authorities with creditor coordination in line with IMF policies.
- Assessment of pace:
- Debt restructuring declared after April 2022 default; as of December 2023 progress described as relatively swift compared to other restructurings, though still time-consuming.
- A summary of key financial terms of the Chinese agreement-in-principle was shared with IMF staff on a strictly confidential basis and assessed for consistency with program parameters.
- Implementation risk: timely implementation of official and commercial creditor agreements is critical to restore debt sustainability over the medium term.
Exchange rate, reserves, and monetary policy
- Exchange rate movements:
- Appreciated by about 25% from March until end May.
- Depreciated by about 10% over the summer.
- Reserves: strong build-up in the first half of the year; reserve accumulation slowed over the summer and is picking up again.
- Policy guidance: continue to build reserves and allow exchange rate flexibility, limiting interventions to disorderly market conditions.
- Monetary policy: Central Bank should continue multi-pronged disinflation strategy to safeguard credibility of inflation targeting.
Governance, anti-corruption, and structural reforms
- Publication of a Governance Diagnostic Report (structural benchmark, first in Asia) marks progress; authorities committed to action plan to follow up on recommendations.
- Critical governance reforms highlighted:
- Transparent and merit-based selection of anti-corruption commissioners.
- Publication of tax exemptions.
- Comprehensive asset recovery law.
- Public asset declarations for relevant public officials.
- Emphasis: timely implementation of governance recommendations to deliver tangible economic gains.
Timeline and next review
- IMF mission expects to travel to Sri Lanka sometime in March or April and aims to conclude the second review by the end of the first half of the year, subject to on-the-ground developments.
- Second review prerequisites: official sector agreements turned into firm agreements/MOUs and agreements with commercial creditors reached.
Key policy recommendations and action items
- Sustain reform momentum with strong ownership by authorities and citizens.
- Further advance revenue mobilization and strengthen revenue administration.
- Align energy pricing with costs and maintain cost-reflective pricing for electricity and fuel (continuous structural benchmark).
- Strengthen social safety nets, maintain minimum spending floor, and ensure objective eligibility criteria and dynamic Social Registry targeting.
- Accumulate reserves and permit exchange rate flexibility; intervene only to prevent disorderly market conditions.
- Implement central bank valuation and undertake recapitalization via equity injections (program space about 1.5% of GDP).
- Implement bank recapitalization plan for largest banks; use program buffers and budget support to facilitate necessary equity injections (program allocation about 6% of GDP; current tranche about .5% of GDP).
- Finalize and sign Memoranda of Understanding with official creditors; reach agreements with external private creditors to restore debt sustainability.
- Follow up and implement Governance Diagnostic Report recommendations, including transparent appointments and asset recovery frameworks.
Transcript of Press Briefing: IMF Executive Board Completion of Second Review for IMF-Supported Program for Sri Lanka