Transcript

Transcript of Press Briefing: IMF Executive Board Completion of Second Review for IMF-Supported Program for Sri Lanka

December 12, 2023

Moderator:

MEERA LOUIS

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

Mr. Breuer: Today, the 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). This brings the total IMF financial support disbursed so far to SDR 508 million (about US$670 million) out of the total amount of SDR 2.286 billion (about US $3 billion). The program continues to support Sri Lanka’s efforts to restore macroeconomic stability and debt sustainability, safeguard financial stability, and enhance growth-oriented structural reforms (See Press Release No. 23/439).

Today’s Board approval recognizes the challenging policy actions implemented by the Sri Lankan people to put the crisis behind them. Sri Lanka’s performance under the program was satisfactory. 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. These macroeconomic policy reforms are starting to bear fruit and the economy is showing signs of stabilization, with rapid disinflation, significant revenue-based fiscal adjustment, and reserves build-up.

The key to transitioning from stabilization to a full and swift recovery is sustaining the reform momentum amid strong ownership by the authorities and the Sri Lankan people more broadly. We encourage the authorities to continue to build on these hard-won gains and further advance revenue mobilization, align energy pricing with costs, strengthen social safety nets, rebuild external buffers, safeguard financial stability, combat corruption and enhance governance. Reinforcing the revenue-based fiscal consolidation with revenue administration reforms is critical to recover from program slippages and to fund the provision of essential government services. The Central Bank of Sri Lanka should continue to focus on the multi-pronged disinflation strategy to safeguard the credibility of its inflation targeting regime. Accumulating reserves, supported by exchange rate flexibility, remains an important priority under the EFF. Implementing the bank recapitalization plan and strengthening the financial supervision and crisis management frameworks are crucial to safeguarding financial sector stability. We encourage the authorities to remain steadfast on their reform commitments.

Commendably, Sri Lanka has also reached important milestones in putting debt on the path towards sustainability. Sri Lanka’s agreements-in-principle with the Official Creditors Committee and the Export-Import Bank of China on debt treatments are consistent with the program targets. It is now important for the Sri Lankan authorities and the official creditors to sign the respective Memoranda of Understanding. Timely implementation of the agreements, together with reaching a resolution with external private creditors, should help restore Sri Lanka’s debt sustainability over the medium term. IMF staff will continue to assist the authorities with creditor coordination in line with the IMF’s policies.

The publication of a Governance Diagnostic Report, the first in Asia and a structural benchmark under the program, is another commendable step taken by the authorities. Continued commitment to improving governance and timely implementation of the report’s recommendations can deliver tangible economic gains to the citizens of Sri Lanka. We look forward to further engagement and collaboration with stakeholders and civil society organizations on this critical reform area.

Finally, we welcome the authorities’ firm commitment to strengthen social safety nets, including through a minimum spending floor, the selection of beneficiaries through objective eligibility criteria, and well-targeted spending through the dynamic Social Registry. We emphasize the importance of continuing to support the poor and the vulnerable.

We would like to thank the authorities for their commitment and look forward to our continued close engagement.

Moderator: Thanks a lot, Before I turn the floor over to you for questions, I'd just like to remind everybody that we've posted the press release. You can find it on our website. You can also find the staff report and several other documents if you have any problems with that. After this press conference, please feel free to reach out to us and we will help you out. Now I'll turn the floor over to you for questions. If you could please identify yourself. The name of your outlet and also unmute yourself when I turn it over to you. So now I will turn the floor over to you for questions. Please raise your hand. Or you can even type in a question via chat.

Reporter: Could you explain a bit about the central bank recapitalization? Plan that is required and how you expect it to happen? And also about this industry, the valuation that you are asking, do I think, mark to market volatility that you are you're concerned about?

Reporter: My question is you have mentioned the future missions that Sri Lanka should keep on wanting. What's your overall assessment of Sri Lanka path of recovery And now with the increasing of taxation, especially now the government has seen produce 18% back from next January and it will be a huge impact on the social spatial divide, not about communities. So now how can Sri Lanka minimize these social effects of these type of drastic measures? Because now there are some, you know, social unrest and the need for the. We had various kind of agitations coming on. So how can Sri Lanka manage these situations in this context?

Moderator: I'm going to take two other questions, and then I will turn it over to Peter.

Reporter: You did say that all of the targets were met, barring one, and that was the one on tax revenues. My question is pretty similar to what I heard also, was that at a time when, you know, the people in the country are facing a lot of trouble, do you think.

Reporter: Increasing tax revenues could put forth for the burden on them? And also, how are you, you know, directing the government to make sure that some of the tax revenue targets are met and are and are adhered to? Is there any roadmap for that? Technology. I'll take one other question and then I'll turn it over to Peter, after which I will have a second round.

Reporter: Thank you for your presentation. I would like to ask if you could set the record straight at the at the beginning, because a benefit would come into being that. We're working that most of the revenue and most of the decisions that the government is doing is the ultimate goal to do this. Could you also set the record straight on that, on what are actually doing in the government funded support program? Could you elaborate on the time that that's going on or the time taken for the approval? What is the construct and how long do you think it would take for the next month? Thank you.

Mr. Breuer: The economy is doing as a whole. And then there were questions on the taxes. So on the growth front, high frequency indicators suggest that the economy is starting to possibly enter the territory of expansion, which is very good news. And we are projecting that next year there will be positive growth. I think there are signs that the all these reforms are paying off. But clearly, the economy is not yet out of the woods. A lot more reforms need to happen. And sustaining this reform momentum is really key for the economy to safely emerge from from the crisis.

So, as you know, it contracted. In the in the second quarter, 3.1%. And we are projecting that for the year as a whole, the economy in 2023 will have declined 3.6%. So we're hoping we are projecting a turnaround to positive growth of 1.8 next year. Now, with respect to the questions on taxation, on increasing the value added tax. Sri Lanka continues to be an economy with exceptionally low tax revenues. I'd like to draw your attention to a chart in the staff report that we published a couple of hours ago. It's on, I think it's page ten and the published version on government revenues in emerging markets and middle income economies. And then you can see that in 2022 Sri Lanka's. Revenue was 8.3% of GDP compared to an average of other emerging market countries of just above 26%. So almost three times as much. And this revenue is needed for the government to provide the essential services that the government provides without such revenue.

It's not possible for the government to provide the services that the citizens expect of the government. So raising revenue continues to be of paramount importance in Sri Lanka. Despite all these measures that have been taken, there's still a long road ahead to get revenue to a level where the expenditures can be supported. And yes, we are cognizant that VAT is not an optimal tax. It would be more desirable to have a more progressive tax system in place. But despite the tax reforms last year, there have been small shortfalls in tax collection. And in a situation like that, one has to look into second best options. And so raising the VAT is one of those. Now. You know, that VAT rate is not unprecedented. But over the medium term, it will in fact be advisable to look into other measures for a more progressive tax. There was also a question sort of how can tax revenue be. Increased and how can we make sure that Sri Lanka will, in fact, you know, raise its revenue to a more viable level? And there I'd like to point to point you to two measures that the Sri Lankan authorities have undertaken, also described in our report.

One of them is the introduction of key performance indicators related to tax administration. So these relate to payments and filings, reporting and registrations of taxpayer assets. So that should hopefully contribute to making tax administration to be able to enable them to raise the taxes needed. And then the second area of reforms is the introduction of various subunits in the Internal Revenue Department relating to high net worth individuals and how to design and monitor various tax indicators. So these are measures that that should help to raise taxes. Perhaps someone can speak a bit about the social aspect and the how the social impact can be mitigated. And Katya capture on the CBC recapitalization.

Ms. Jahan: Thank you, Peter. I'd just like to take a moment to add on to the question on raising VAT. I'd also like to point out that exemptions relate lifted from many items, but some of the most essential items, including the ones that are consumed by low-income households, are still exempted. These include fruits, vegetables, rice, flour and wheat flour. So despite the increase in the VAT, there are measures to help the poor and the vulnerable. I'd also like to mention that the tax reforms that we have helped the authorities design are highly regressive in nature. So those who can afford to pay do so and in a fair manner. In terms of social unrest, we see that it is very important in the program, again, to mitigate the impact on the poor and vulnerable from many of the economic reforms that are being undertaken. So part of the program, we have designed a social protection scheme where there is a minimal spending floor. Last year it was about ₹187 billion. This year, in 2024, the budget has increased to about ₹205 billion, and this amounts to around 2.6 - 2.7% of GDP. We have also worked with the authorities to ensure that there is better targeting and better coverage and accuracy of the social protection scheme, which will continue to help the poor and the vulnerable. And I think these are some of the measures that will help check the social unrest. In the end, I would like to say that through macroeconomic stability and through achieving recovery slogans, we'll be better off for all Sri Lankans, including the poor and the political. And that, I think, will help mitigate a lot of the social unrest and helps to look and see that keeping to the reform program is in the benefit of all Sri Lankans. Thank you.

Ms. Svirydzenka: A few words on the central bank recap now. Okay. So on the central bank recap question. As you know, one part of the domestic debt operation this summer was an exchange of CBS Holdings of T-bills into longer term T bonds. And this was done to reduce the government's growth financing needs and also to reduce the refinancing risks for the government. At the same time, this comes at the cost to the ECB to sell equity. Why is that? So if you hold your assets over a longer time horizon, which is in T bonds, when you discount them to the net present value, their value becomes lower. And this is where the role of adequate interest rates comes in. These T bonds needs to be valued at the interest rate that is closer to the market. Determine yield curve rather than, say, for example, a theoretical at low interest rate. And so if you discount them at the appropriate yield curve, the net present value of the holdings will be lower as a result. There will be an impact on this on the equity of the central bank. And therefore, we strongly encourage the government to firstly value these bonds appropriately in consultation with us and also with the auditors and accountants, and also then to recapitalize the central bank. How would this be done? This would be done through an equity injection. The program allocated a space of about 1.5% of GDP in the program, designed to lot of space for central bank recapitalization.

Moderator: I think we've covered most of the questions that were asked, so I'll go to the next round. And I also see another question. So there's a couple of questions that were coming via charts. And I know you just talked about central recapitalization of banks. So there's another question related to that. It talks about will the IMF help recapitalize the banks? Can you elaborate a bit more on the financial sector stability? Why is there no mention of Sony divest divestments in the press release? Can we clarify if or not that policy is within the IMF program as alleged by political parties? It's how have you assessed the high tax impact, especially on inflation and interest rates, in 2024?

Moderator: I'm going to read out his question and please reach out to us bilaterally if it's not what you actually wanted to ask. He's asking, you know, the IMF is told Sri Lanka to implement very sort of reforms. And he asks what more reforms needs to be done. And he's also asking about the next steps or the next second tranche. When do you anticipate that's going to happen? Thank you.

Mr. Breuer: Thank you so much. Maybe I can take that last question and. Someone can speak about the divestment and cut you about the recap of the banks. So. For the second review and I should highlight, by the way, and an easy summary of all the commitments that Sri Lanka has undertaken is essentially on pages 105 to 110 of the bundle that was published today that provides an overview of the quantitative and, you know. Actions to be taken. Looking ahead, what is important for the second review? So of course there is. The debt restructuring that needs as it opening remarks, the agreements in principle with official creditors need to be firmed up and trusts entered into firm agreements and then agreements with the commercial creditors need to be found. So and those need to be in line with the debt targets under the program so that debt sustainability can actually be restored in Sri Lanka. So that's one important aspect.

But secondly, I'd like to just stress again the importance of raising revenue, as as I explained in the first round of questions. That remains a top priority, is really important for. The government to implement the reforms that allow sufficient taxes to be collected to sustain these essential expenditures that the government has and for Sri Lankans to come together and pay these taxes in accordance with what they can do commensurate with their income and their wealth. A third area that we consider very important for the economy to turn around is the area of combating corruption and enhancing governance reforms. So following up on the governance diagnostic that was published on September 30th is very important. The authorities have committed to an action plan of how they will follow up on the recommendations. And then putting into practice implementing this action plan will be very important. We have highlighted a number of areas already that have now become part of the program, some key recommendations. So, for example, ensuring a transparent and merit-based selection of anti-corruption commissioners is extremely important to make sure that they meet the highest levels of professionalism, ethical conduct and integrity.

Because this Commission will lay at the foundation of combating corruption. Similarly, their commitments on publishing all sorts of tax exemptions as well as. Having a comprehensive asset recovery law in there. There's also a commitment for asset declarations of relevant public officials to be made public. Again, that's an important commitment. So these are just a number of reforms that need to take place. There's, of course, more. But let me stop here and hand over to maybe catch you on the on the banks and then solve it under a series.

Ms. Svirydzenka: So on the bank recapitalization, this is an important part of the program to safeguard financial stability. And the Crisis Management Committee developed a recapitalization plan for the five largest banks, taking into account various factors, including the findings of the AQR forward looking developments on loan performance loans, the impact of net open positions, the impact from restructuring of CPC for slowing the impact of restructuring of the Iasb is the largest section of the banking system that's affected. That's the same banks and they're expected to raise additional capital from the government. Private banks may be able to raise capital on their own. And then there'll be additional plans for the other four smaller banks in terms of IMF assistance for this part of the program. Of course, I must provide financing to the government so indirectly that money can be used to help recapitalize banks. But we've also created buffers in the program so that the government can borrow to make equity injections in the banks.

Ms. Jahan: On the issue is I'd like to point out that putting public finances on a sustainable footing is a very important part of the IMF program. And therefore, at the very beginning of the program, we had look into a cost reflective pricing on electricity and fuel. And this continues to be a continuous structural benchmark under the program. Also, in the spirit of putting a series on a sustainable footing, one of our structural benchmarks was to was for the authorities to come up with a strategy of the rebalancing of the city's balance sheet. And here we have looked at four series. One was Sri Lankan Airlines, Ceylon Petroleum Corporation, Ceylon Electricity Board and the Road Development Authority going forward. So these will continue to play an important role in public finances. However, in terms of divesting series, we look to other development partners to work with the authorities. For example, on the See Lankan airlines. IFC is working with the authorities and for ACP, ATP is playing an important role. Thank you.

Moderator: Thank you very much. I think we've covered that last round. I'm going to go to the next round and ask people who raise their hands. But I will first start with a question that's come in via chat. He's asking what exactly is the Chinese offer on financial assurances to Sri Lanka? Lots more details on that.

Reporter: In currently Japan, India, France and do some countries forming the official Kuwaiti death committee and discuss the least discussed with us with the city about the deadly the process. India Currently China is a whisper of the God the committee. And I am prospective death. I expect China to become the official member of that committee or as I am. Is it too acceptable to separately. SEC. And China separately negotiate with the US? How do you evaluate the calling framework of the negotiation with the US with other creditors countries?

Reporter: My question is, you mentioned that the second tranche of part of the funding from the second tranche could be used for refinancing of the banking sector. If I interpreted that correctly, could you give us an indication of either a percentage or a figure of what amount can be used as part of that refinancing?

Reporter: What would be a rough timeline for the second review of the program? And the other question is on implementation risks in terms of the debt treatment. I see that the the kind of report on the country report that also came out overnight flagged that there's not that much in terms of buffers looking at the overall debt treatment that's either agreed or under negotiation right now with officials as well as commercial creditors. So a bit more detail on what the implementation risk for debt relief would be. Thank you.

Reporter: The pace of a debt restructuring has been a concern, even domestically. How does the IMF see the pace of debt restructuring now with the commercial creditors? And what does this mean for the third dance? How does it play debt? That's my first question. Second question is how do you see the exchange rate management of the central bank now? Thank you.

Mr. Breuer: Thank you very much. So let me take the questions on the debt and the timeline for the second review. And maybe I can speak about the financial sector, the recapitalization and the exchange rate. The debt, the many components of the debt, many the process is going on at the same time on the official sector. As was pointed out, there's both the official creditor committee as well as China Exim Bank. Both of these partners have now reached agreement in principle with Sri Lanka on how their debt can be restructured. So from this point of view, the core part of the negotiations has taken place. So of course it's not complete because these agreements in principle need to be converted into actual agreements or in the in the case of the SEC, into memoranda of understanding. So they need to be firmed up as such. We you know, we don't see a need now for China to join the SEC.

And indeed, these two parallel tracks of negotiation have have worked in general. Having one body may may be easier. But I think here in Sri Lanka, we have seen that it is possible to have parallel negotiations that result in agreements in principle that are consistent with debt sustainability. Now, in terms of the pace of negotiation and so on the one hand, Sri Lanka's crisis, really when default was declared in April 2022, we are now in December 2023. So it is taking quite some time. However, when taken in comparison to other debt restructurings, actually the one in Sri Lanka is progressing relatively swiftly. So that is good news for Sri Lanka because that cloak of uncertainty that hangs over the economy is really holding back the recovery.

So the quicker the restructuring, the better for the economy. With respect to the question of specifically the Chinese agreement, in principle, this is very good news in Sri Lanka's debt restructuring talks. We have seen a summary of the key financial terms of the agreement shared by the authorities on a strictly confidential basis and assess their consistency with program parameters. With respect to the timeline of the of the second review, we would expect that these official sector agreements in principle are turned into agreements by the time of the second review and also that agreements have been reached with the commercial creditors. We would travel back to Sri Lanka next year and expect that the second review could be concluded by the end of the first half of the of the year. Again, it depends on developments on the ground. But we expect to travel to Sri Lanka sometime in March or April and then conclude the review.

Ms. Svirydzenka: How much of the IMF financing can be used for bank recapitalization? If I understood the question correctly. And the answer is IMF financing is provided as budget support. So then it's up to the government of how they allocate those funds and where they go to. In principle, they help you in terms of bringing in foreign exchange in Sri Lanka. More broadly to give a sense of scale, we've allocated about 6% of GDP in terms of bank recapitalization and the size of the current tranche that's provided following the board meeting today is about .5% of GDP. So the needs are a little bit higher than what the current tranche has. On the exchange rate. I think the question was how the central bank is performing on exchange rate performance. So we've seen the exchange rate appreciated by about 25% from March until end May this year. Since then, we've seen some depreciation of the scale of 10% over the summer. As a counterpart to that, we've seen the central bank build up foreign exchange reserve quite strongly in the first half of the year. Since then, reserve accumulation slowed over the summer and now it's picking up again. Going forward, there's need to continue to build in reserve. But the central bank and to allow the exchange rate to be fairly slow down, limiting interventions only to disorderly market conditions. Thank you.

Moderator: We just have one last question. The reporter is asking for your opinion on the introduction of a property tax. If you have any update on that, how the talks with the Sri Lankan authorities are progressing on that. And she also says in your press release, you highlight the need for the ownership of the program by the people of Sri Lanka. But she says but the government is going ahead with the reforms and tax increases, saying that they will be pushed by the IMF to do this. In this context, do you really think that people will take ownership of this program? And I think with that, we can close.

Mr. Breuer: Thank you so much. So the property tax will be an important part of raising revenue in 2025. By following all these reforms that have already taken place this year and the previous year. Implementing such a tax is a very long and complex tasks, a task one needs to have a proper registry of properties. There needs to be proper valuation systems in place in order to impose this tax. But it is a form of, you know, taxing those with a greater degree of wealth more. So it is it is a progressive form of taxation. And we do encourage the authorities to, you know, pursue this vigorously and swiftly.

And indeed, we have had discussions on this. And the IMF also has provided technical assistance on this. And this will certainly be an issue in the time ahead with respect to ownership. So the ownership is so important. Ownership of the reforms is really what determines the success of a program. We have seen this at the fund many times. If a country, the government, its people really embrace the reforms to extract themselves from the crisis, they succeed and they recover it on a path of stable and inclusive growth. In other cases where this ownership lacks it, reforms often fail.

And then the country might go right back to a crisis where it started from. And so the people of Sri Lanka have lived through this very severe crisis last year, in the summer of 2002 and will remember the significant consequences that this has had for their daily lives. Up to this day today. And so it will be important to all come together and embrace the reforms so as to fully emerge from this crisis and not have another crisis follow soon after. So this is what we mean by ownership being so important to break this boom bust cycle.

Moderator: Thank you. It's a lot better and I think we are well over time. So I'm just going to ask if any of you have any parting thoughts. To leave with reporters. If not, I know there's been a rich discussion today. So there's no other parting thoughts. Peter, do you have any closing remarks or anything you think you wanted to add that was not addressed?

Mr. Breuer: I think this point on ownership is a it's an important one to be partnering with it. It really is important for the authorities, with the support of the people, to hold fast to the reforms and continue on this trajectory to allow Sri Lanka to emerge from this very, very severe crisis.

Moderator: Thank you very much for your courteous support for your time. And also, I want to thank all the reporters for your time and help in covering this topic. And if you have any clarifications, please feel free to reach out to us. So thank you again, everybody, for your time and have a good day. Take care.