Transcript of Press Briefing at the Conclusion of the IMF Staff Visit to Sri Lanka
IMF News, January 19, 2024
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Bibliographic details
- Published: January 19, 2024
Mission timing and participation
- IMF mission led by Mr. Peter Breuer was in Sri Lanka from January 11th to January 19th.
- Participants named: PETER BREUER (Senior Mission Chief to Sri Lanka) and SARWAT JAHAN (Resident Representative in Sri Lanka).
Key economic findings and outlook
- Real GDP recorded positive growth of 1.6 percent year on year in the third quarter of 2023 — the first expansion in six consecutive quarters.
- Gross international reserves increased by $2.5 billion during 2023.
- Preliminary data point to improved fiscal revenue collections during the fourth quarter of 2023.
- IMF staff projection (from December 2023 Staff Report): a contraction for 2023 of 3.6 percent.
- IMF staff projection looking forward: almost a 2 percent growth for 2024.
Fiscal policy, taxation, and revenue targets
- Tax revenue context:
- In 2019, tax revenue amounted to approximately 11 percent of GDP.
- Tax revenue went down to 7 percent of GDP in 2022.
- Expenditures are said to be of the order of 20 percent of GDP, creating a gap of 13 percent of GDP (as stated in the briefing).
- Revenue targets and trajectory (as stated by mission):
- Hope that revenue/expenditure (transcript wording) goes from 7 percent of GDP last year to 9 percent of GDP this year.
- Objective of reaching 12 percent in 2024 and then 14 percent beyond that in 2025.
- Policy measures and administration:
- Swift progress towards introduction of a progressive property tax is key to fair burden sharing while sustaining revenue-based consolidation.
- Tax policy measures need to be accompanied by strengthening tax administration, removing tax exemptions, and actively eliminating tax evasion.
- Large taxpayer unit and high net worth individuals unit reforms are described as “well underway” to support tax collection efforts.
- Commitment in the program to grant no new tax concessions and to enhance transparency on tax concessions and exemptions (publication commitments discussed).
Debt restructuring, creditor engagement, and timelines
- Domestic debt operation execution described as an important milestone; domestic operation completed.
- Agreements in principle have been reached with some official creditors; these need to be converted into actual agreements.
- Commercial creditor (bondholder) negotiations are ongoing; proposals are being exchanged.
- Specific creditor engagement noted:
- An agreement in principle with the Export-Import Bank of China has been reached and needs conversion into an actual agreement.
- China Development Bank is considered a commercial creditor and negotiations are ongoing.
- IMF expectation and timeline:
- Strong expectation of an agreement in principle with commercial creditors by the time of the second review.
- Review cycle for Sri Lanka’s program is semi-annual (every six months). Sri Lanka completed the first review in December. The second review is expected on that cycle (mission return in the Spring of the year for the formal assessment), with the paper then sent to the IMF Executive Board several weeks later.
Monetary policy and central bank issues
- Building on the central bank’s success in taming inflation, future monetary policy decisions should remain prudent with a focus on keeping inflation expectations well anchored.
- Inflation objective: 5 percent with a band of plus or minus 2 percent (implying 7 percent is at the edge of the target band).
- Central Bank balance sheet and recapitalization:
- If the Central Bank has negative equity as a result of restructuring of its exposure to the government, that could weaken its independence and capacity.
- IMF considers it important that the Central Bank be adequately recapitalized as soon as its capital may become negative to safeguard its ability to pursue its inflation objective.
Financial sector stability
- Urgent need to finalize amendments to the Banking Act as committed under the IMF-supported program.
- Implement bank recapitalization plans and strengthen financial supervision and crisis management frameworks to safeguard financial stability and bolster the sector’s capacity to support growth.
Governance, anti-corruption, and asset recovery
- Following publication of the IMF Governance Diagnostic Report, authorities are expected to adopt an action plan to implement recommendations beyond priority EFF commitments.
- Program incorporates high-priority Governance Diagnostic recommendations, including:
- Publication of an action plan for implementing Governance Diagnostic recommendations (targeted for February in the briefing).
- Enhanced transparency measures: designated website for public procurement contracts, publication of firms receiving tax exemptions (BUI or SDP), and publishing list of firms receiving tax exemptions on luxury vehicle imports.
- Enacting a comprehensive asset recovery law (proceeds of crime / asset recovery included as a program benchmark).
- Cabinet approval and publication of a framework to strengthen governance in public banks.
- Publish asset declarations for Senior Officials in line with the Anti-Corruption Act.
- Governance Diagnostic described as a one-off, comprehensive product that will serve as a basis for reforms; program includes structural benchmarks and commitments tied to governance and transparency.
Social protection, regional visits, and economic inclusion
- Shortages of essentials have eased but improvements need to translate into improved living conditions for Sri Lanka’s people.
- Program emphasizes protecting the poor and vulnerable via improved targeting and better coverage of cash transfers.
- Mission visited northern and eastern provinces (including Trincomalee Port Harbor, Jaffna, Tkemali) to understand regional challenges and development potential; prior visits included Gaul, Dambulla, and Sigiriya.
- Examples observed: a woman-led SME producing handicrafts for export (recycled paper and fabric), illustrating resilience and diversification potential.
- Climate-related challenges (floods) observed in field visits.
Program implementation, conditionality, and monitoring
- Sustaining reform momentum and timely implementation of program commitments are critical to rebuilding confidence and putting recovery on a firm footing.
- Program monitoring and reviews:
- Progress on quantitative performance criteria and structural benchmarks (including end-December performance criteria) will be formally assessed at the second review.
- The mission reiterated its role in engaging authorities, identifying challenges, and discussing remedies prior to formal assessment.
- Digitization and anticorruption:
- IMF encourages digitization to reduce opportunities for noncompliant transactions; digitization is under discussion with authorities.
- Program includes commitments for anticorruption plans in various agencies to address revenue leakages and improve collections.
Key statistics cited in the briefing
- Mission dates: January 11th to January 19th.
- Real GDP growth: 1.6 percent year on year in Q3 2023.
- Consecutive quarters of prior contraction: six consecutive quarters before Q3 2023 expansion.
- Gross international reserves increase: $2.5 billion during 2023.
- Staff Report projection for 2023: contraction of 3.6 percent.
- Staff projection for 2024 (as stated): almost a 2 percent growth.
- Tax revenue: approximately 11 percent of GDP in 2019; 7 percent of GDP in 2022.
- Expenditures described as of the order of 20 percent of GDP.
- Fiscal gap described as 13 percent of GDP (based on figures above).
- Revenue/expenditure target trajectory statements: from 7 percent of GDP last year to 9 percent of GDP this year; objective of reaching 12 percent in 2024 and then 14 percent beyond that in 2025.
- Inflation objective: 5 percent with a band of plus or minus 2 percent (7 percent at the edge).
- Review cycle: semi-annual every six months; first review completed in December; second review expected in Spring (six months from the last visit/board meeting).
Transcript of Press Briefing at the Conclusion of the IMF Staff Visit to Sri Lanka — January 19, 2024. IMF Communications Department.