IMF Executive Board Concludes 2024 Article IV Consultation with Sri Lanka and Completes the Second Review Under the Extended Fund Facility
IMF News, June 12, 2024
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- Published: June 12, 2024
Program approval and disbursements
- The Executive Board completed the second review under the 48-month Extended Fund Facility (EFF) Arrangement, allowing the authorities to draw SDR 254 million (about US$336 million).
- Total IMF financial support disbursed so far is SDR 762 million (about US$1 billion).
- The EFF arrangement was approved on March 20, 2023 in an amount of SDR 2.286 billion (395 percent of quota or about US$3 billion).
- The first review of the EFF was completed on December 12, 2023 with disbursements of SDR 254 million (about US$337 million).
Program objectives and policy focus
- The EFF-supported program aims to:
- restore macroeconomic stability and debt sustainability,
- mitigate the economic impact on the poor and vulnerable,
- rebuild external buffers,
- safeguard financial sector stability,
- strengthen governance and growth potential.
- The 2024 Article IV Consultation focused on reforms to restore macroeconomic stability and debt sustainability, maintain price stability, safeguard financial stability, rebuild external buffers, and implement growth-oriented structural reforms, including by strengthening governance.
Performance under the program and vulnerabilities
- Performance under the program has been strong: all quantitative targets for end-December 2023 were met, except the indicative target on social spending.
- Most structural benchmarks due by end-April 2024 were either met or implemented with delay.
- Signs of economic recovery:
- Real GDP expanded by 3 percent (y-o-y) in the second half of 2023.
- May 2024 inflation was 0.9 percent.
- Gross international reserves increased to US$5.5 billion by end-April 2024.
- The primary balance improved to a surplus with tax revenue increasing to 9.8 percent of GDP in 2023.
- Banking sector: improvements in non‑performing loans, but pockets of vulnerabilities remain.
- The recovery remains gradual; the path to debt sustainability is described as “knife-edged.”
- Risks:
- Domestic: waning reform momentum, especially on revenue mobilization.
- External: intensified regional conflicts, commodity price volatility, global slowdown.
- Slow progress in debt restructuring could widen financing gaps.
Outlook and projections
- Growth is projected to recover moderately in 2024-25 given constrained bank credit and fiscal consolidation, while facing uncertainties around the debt restructuring and policy direction following the elections.
- Inflation is expected to temporarily increase due to one-off factors.
- The current account is expected to remain positive in 2024, driven by improved tourist arrivals and remittances.
Policy recommendations and priorities (as stated by IMF management and Directors)
- Fiscal policy:
- Sustained revenue mobilization efforts.
- Promptly finalize debt restructuring in line with program targets.
- Protect social and capital spending.
- Advance public financial management to enhance fiscal discipline.
- Strengthen the debt management framework.
- Monetary policy:
- Prioritize price stability.
- Sustain commitment to refrain from monetary financing.
- Safeguard central bank independence.
- Continue exchange rate flexibility and gradually phase out balance of payments measures to rebuild external buffers and facilitate external rebalancing.
- Financial sector:
- Restore bank capital adequacy.
- Strengthen governance and oversight of state-owned banks to revive credit growth.
- Swiftly complete restructuring of remaining domestic law and foreign currency loans.
- Ensure adequate recapitalization of commercial and state‑owned banks.
- Implement recently enacted Banking Act amendments effectively.
- Strengthen the anti‑money laundering and counter‑terrorism financing framework.
- Structural and governance reforms:
- Steadfast implementation of governance reforms and the authorities’ action plan from the Governance Diagnostic Report.
- Further trade liberalization to promote exports and foreign direct investment.
- Labor reforms to upgrade skills and increase female labor force participation.
- State‑owned enterprise reforms to improve efficiency and fiscal transparency, contain fiscal risks, and promote a level playing field for the private sector.
- Prioritize reforms to liberalize trade, improve the investment climate and SOE efficiency, reduce gender gaps in the labor market, and mitigate climate vulnerabilities.
- Debt restructuring:
- Swift finalization of the Memorandum of Understanding with the Official Creditor Committee and final agreements with the Export‑Import Bank of China.
- Seek comparable, transparent, and timely restructurings with external private creditors consistent with program targets.
Executive Board Assessment (summarized)
- Directors commended strong performance under the Fund‑supported program and noted reforms are bearing fruit: recovery starting, low inflation, improving revenue, and accumulating reserves.
- Important vulnerabilities and uncertainties remain, including ongoing debt restructuring and upcoming elections.
- Directors called for continued strengthening of macroeconomic policies to restore economic stability and debt sustainability and to sustain reform momentum for long‑term inclusive growth.
- Specific director recommendations echoed management’s priorities on revenue measures, tax administration reforms, limiting and making tax exemptions more transparent, protecting growth‑enhancing and social spending, and improving the social safety net.
- Directors welcomed submission of the new Public Financial Management bill to Parliament and progress on cost‑recovery in energy pricing.
Selected economic indicators (highlights from 2021–2029 table)
- Real GDP:
- 2021: 4.2
- 2022: -7.3
- 2023: -2.3
- 2024 (Prel.): 2.0
- 2025 (Projections): 2.7
- 2026: 3.0
- 2027: 3.1
- Inflation (average, Colombo CPI):
- 2021: 6.0
- 2022: 45.2
- 2023: 17.4
- 2024 (Prel.): 7.0
- 2025: 5.8
- 2026: 5.4
- 2027: 5.2
- 2028: 5.1
- 2029: 5.0
- National savings (percent of GDP):
- 2021: 33.0
- 2022: 27.6
- 2023: 33.9
- 2024: 32.5
- National investment (percent of GDP):
- 2021: 36.7
- 2022: 28.6
- 2023: 30.8
- 2024: 32.1
- Current account balance (in millions of U.S. dollars):
- 2021: -3,285
- 2022: -744
- 2023: 2,644
- 2024: 412
- 2025: -926
- Gross official reserves (end of period, in millions of U.S. dollars):
- 2021: 3,139
- 2022: 1,898
- 2023: 4,387
- 2024: 5,605
- 2025: 7,174
- 2026: 9,262
- 2027: 13,466
- Usable Gross official reserves (end of period):
- 2021: 1,565
- 2022: 462
- 2023: 2,951
- 2024: 4,169
- External debt (public and private, in billions of U.S. dollars):
- 2021: 58.4
- 2022: 57.4
- 2023: 52.7
- 2024: 53.6
- 2025: 55.6
- Public debt (in percent of GDP):
- 2021: 114.8
- 2022: 126.3
- 2023: 115.7
- 2024: 114.2
- 2025: 113.1
Source: IMF Executive Board Concluding Statement and Press Release, June 12, 2024.
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