Press Briefing on Sri Lanka's 2024 Article IV Consultation and the Second Review under the Extended Fund Facility

IMF News, June 14, 2024

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Canonical URL: Press Briefing on Sri Lanka's 2024 Article IV Consultation and the Second Review under the Extended Fund Facility

Program: 48-month Extended Fund Facility (EFF).
IMF immediate access in Second Review: about $336 million.
Total IMF financial support dispersed so far: about $1 billion.
Executive Board assessment: strong program performance; "All quantitative targets were met except for the marginal shortfall of the indicative target on social spending." Most structural benchmarks were either met or implemented with delay.

Real GDP: expanded by 3 percent year-on-year in the second half of 2023.
Inflation: May 2024, inflation was 0.9 percent.
Gross international reserves: increased to $5.5 billion dollars by the end of April of this year.
Primary balance: improved to a surplus.
Tax revenue: increased to 9.8 percent of GDP in 2023.
Historical and program revenue context:
- Government revenue to GDP: "from the region of 20 percent of GDP in the 1980s to around 8 percent in 2022."
- Program revenue target: "rebuild this revenue collection" aiming "to the region of 15 percent of GDP in 2025."
- Cross-country comparison: "between 2019 and ‘22, Sri Lanka had general government revenues on average of about 9.3 percent, and that compares to an average of these other countries of 26 percent of GDP."

Overall assessment: economy is "starting to recover" but "still vulnerable" and "the path to debt sustainability remains knife edged."
Identified vulnerabilities and uncertainties:
- Ongoing debt restructuring process.
- Revenue mobilization challenges.
- Reserve accumulation.
- Banks’ ability to support the economic recovery.
- Political uncertainty linked to upcoming elections (risk of policy changes or delays).
Policy stance emphasized:
- Sustain reform momentum with strong ownership by authorities and the public.
- Monetary policy to prioritize price stability, refrain from monetary financing, and safeguard central bank independence.
- Maintain exchange rate flexibility and gradually phase out balance of payments measures to rebuild external buffers.
- Restore bank capital adequacy and strengthen governance and oversight of state-owned banks.

IMF view: "Sri Lanka's debt is unsustainable" and debt restructuring is essential to restore debt sustainability.
Progress reported:
- "Sufficient progress for the debt restructuring to move forward."
- "There is agreement on the substance of the financial and legal terms with both types of Official Creditors" and remaining issues are described as procedural.
Priorities for completion:
- Swift finalization of the Memorandum of Understanding with the Official Creditor Committee.
- Final agreements with the Export Import Bank of China.
- Completion of restructuring with external private creditors consistent with program targets.
Note on creditor concerns: Official creditors focus on "comparability of treatment"; IMF interest is whether debt restructuring targets are met.

Rationale for revenue measures: fiscal crisis driven by collapse in fiscal revenue; rebuilding revenue seen as essential to restore fiscal sustainability and finance essential public services.
Program objective: increase revenue toward "the region of 15 percent of GDP in 2025" and reduce the fiscal gap to help restore debt sustainability.
Tax policy timing: authorities plan new tax policy measures to be submitted to parliament by end of this month (as referenced in discussion).

Broad priorities to unlock long-term growth:
- Further trade liberalization to promote export and foreign direct investment.
- Labor reforms to upgrade skills and increase female labor force participation.
- State-owned enterprise (SOE) reforms to improve efficiency and transparency, contain fiscal risks, and promote a level playing field for the private sector.
SOE reform elements supported under the IMF program:
- Cost recovery for fuel and electricity to make SOEs financially viable.
- Governance and transparency improvements supported by World Bank and Asian Development Bank.

Governance Diagnostic Report (published September; first in Asia) provided time-bound recommendations.
Structural benchmarks and implementation updates:
- Government action plan for implementing Governance Diagnostic Report: published in May 2024 (structural benchmark met).
- Publication, on a semi-annual basis on a designated website, of all public procurement contracts above $1 million with award information: met.
- Publication of a list of firms receiving tax exemptions via Board of Investment or SDP and list for luxury vehicle tax exemptions: met.
- Comprehensive asset recovery law: original target end April; reprogrammed with new target date end November 2024.
- New structural benchmark on anti-corruption in revenue agencies: develop in each revenue department (IRD, customs, excise) an implementation plan to launch a program of anti-corruption measures (code of conduct, international affairs department, risk management and automation) — due by the end of August.

Program commitment: "mitigate the economic impact on the poor and vulnerable" and protect social spending.
Social spending and cash transfers:
- Minimum spending floor for social protection agreed for each quarter.
- Administrative bottlenecks noted (grievance cases, bank account openings) affecting cash transfer delivery.
- Second round of applications for cash transfers: about 450,000 applicants; data validation underway.
Complementary measures: authorities, with World Bank and ADB support, are considering a livelihood improvement program to help beneficiaries graduate to higher incomes and reduce dependence on cash transfers.

IMF assistance: staff will continue to assist authorities with creditor coordination in line with IMF policies.
Dialogue around elections: IMF will respect the democratic process; missions and timing may be adapted to election schedules. IMF is "willing to listen to different views" on achieving program objectives provided proposals are realistic and achievable within program timeframe.

Transcript of IMF press briefing on Sri Lanka's 2024 Article IV Consultation and Second Review under the Extended Fund Facility, June 14, 2024.