Press Briefing Transcript: IMF Executive Board Completes Fourth Review of Sri Lanka’s Extended Fund Facility
IMF News, July 3, 2025
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- Published: July 3, 2025
IMF Board decisions and financing
- On July 1st the IMF Executive Board completed two board decisions for Sri Lanka.
- The Board granted the authorities' request for waivers of non observance of the quantitative performance criterion that gave rise to non-compliant purchases and decided not to require further action in connection with the breach of obligations under Article 8, Section 5.
- The Board completed the 4th review under the Extended Fund Facility, allowing Sri Lanka to draw 315 million U.S. dollars from the IMF, bringing the total so far to about one and three quarters of one billion .
- This funding is intended to support Sri Lanka's ongoing economic policies and reforms and to help durably restore macroeconomic stability.
Program performance and compliance
- Performance under the program in the 4th review described as generally strong, with some implementation risks being addressed.
- Two prior actions for the review were met:
- Restoring cost recovery electricity pricing for the remainder of 2025.
- Operationalizing the automatic electricity tariff adjustment mechanism.
- All quantitative targets for the end of March 2025 were met with the exception of the stock of expenditure arrears.
- All structural benchmarks due by end of May 2025 were either met or implemented with a delay.
- The stock of government expenditure arrears had a ceiling of zero under the program; underreporting led to missing this quantitative performance criterion in the first, second, and third reviews, prompting the waiver.
Data underreporting, arrears, and waiver
- Inadvertent underreporting of government expenditure arrears was identified during staff review of the budget appropriation.
- One source of underreporting: previous interest subsidy scheme for senior citizens that ran out at end of 2022; outstanding liabilities were published by the Ministry of Finance but were not reported to the IMF under the program.
- Weaknesses in timely reporting of outstanding liabilities by line ministries contributed to a misunderstanding of the definition of arrears under the program's technical memorandum of understanding.
- Authorities provided corrected data, undertook corrective measures, started reporting the full stock of arrears, and put in place a plan to clear existing arrears.
- The Executive Board approved the authorities' request for a waiver of non-observance of the quantitative performance criterion on arrears based on the corrective actions and commitments, and IMF staff will provide technical assistance to improve processes and practices.
Macroeconomic developments and outlook
- Recovery and growth:
- Rebound in growth in 2024 and so far in 2025 reflects a broad and strong recovery amid rising confidence among consumers and businesses.
- Revenue performance:
- Revenue to GDP ratio climbed to 13.5% in 2024, continuing to climb in 2025 from 8.2% in 2022.
- In the current year's budget and IMF forecast, tax revenues are targeted at a little bit less than 14%, about 13.9% of GDP.
- Primary balance targeted at 2.3% of GDP.
- Inflation and external:
- Inflation in the second quarter of 2025 continues to be below the central bank inflation target, largely due to electricity and energy prices, and is moving closer to target.
- Sri Lanka has signed bilateral debt restructuring agreements with Japan, France and India, bringing the debt restructuring near completion.
Electricity and energy sector reforms
- Cost-recovery electricity pricing and an automatic electricity tariff adjustment mechanism are program pillars:
- Maintaining cost recovery electricity pricing is viewed as essential to contain fiscal risks and ensure the utility operates on commercial grounds.
- Tariffs are differentiated by consumer category (lower for small residential consumers with progressive increases for higher consumption), with quarterly average tariff adjustments to ensure financial viability.
- Program provisions include protecting the poor and vulnerable while implementing cost-reflective pricing.
- PUCSL tariff formula review and technical assistance:
- IMF and authorities discussed changing the PUCSL formula; technical assistance on evaluating the formula will be completed by November.
- Cross-subsidies between sectors are acknowledged as wide; options include examining reduction of cross-subsidies and replacing implicit cross-subsidies with transparent Treasury subsidies, possibly linked to reforms in the Electricity Act and in coordination with development partners.
Fiscal policy, tax exemptions, and revenue mobilization
- Sustained revenue mobilization is critical to restore fiscal sustainability and create fiscal space.
- Concerns with past tax exemptions:
- Granting ad hoc, non-transparent, and large tax exemptions created significant foregone revenue and corruption vulnerabilities.
- Authorities committed to refrain from granting tax exemptions until the new tax exemption framework is updated to meet best practices with IMF technical assistance.
- Structural benchmarks on tax exemptions:
- Amend the STP Act by end of August.
- Amend the Port City Act by end of October, including associated regulations that spell out exemptions.
- Continuous structural benchmark: authorities agreed not to provide new exemptions to businesses based on the STP and Port City Acts and regulations until the new framework is in place.
- Policy guidance:
- Tax exemptions should not be the primary tool for attracting foreign investment; frameworks should be transparent, rules-based, and limit duration of incentives.
- Strengthen tax exemption frameworks, boost tax compliance, and enhance public financial management.
- Improve coverage and targeting of social support to protect vulnerable populations.
Governance, anti-corruption, and public financial management reforms
- Governance milestones already taken:
- Legislation enacted to safeguard central bank independence, improve public financial management, and strengthen the legal framework for anti-corruption through The Anti-Corruption Act.
- Sri Lanka underwent the IMF Governance Diagnostic assessment in 2023; its recommendations are embedded in the EFF program.
- Government published an action plan on governance reforms end-February as a structural benchmark under the EFF.
- Enactment of the asset recovery law was a structural benchmark met by the authorities.
- Specific governance actions under the program:
- Requirement to publish public procurement contracts.
- Requirement to publish the list of firms benefiting from tax exemptions.
- Strengthening the asset declaration system and AML/CFT measures.
- Prioritizing anti-corruption reforms at customs and strengthening procurement processes to reduce revenue leakages.
- IMF expectations:
- Continued emphasis on implementing the government action plan on governance and advancing anti-corruption reforms is critical to achieving program objectives.
State-owned enterprises (SOEs) and financial sector reforms
- SOE objectives under the program:
- Resolve legacy debt and implement cost-recovery pricing for electricity and fuel to reduce fiscal risks and contingent liabilities.
- Contain risks from government guarantees to SOEs.
- Refrain from new FX borrowing by non-financial SOEs.
- Increase transparency by publishing audited financial statements of the 52 largest SOEs.
- Financial sector measures:
- Resolve non-performing loans, strengthen governance and oversight of state-owned banks, and improve the insolvency and resolution framework to revive credit growth and support private sector development.
Milestones and focus ahead of the 5th review
- Assessment windows and tests:
- IMF staff will evaluate quantitative performance criteria and indicative targets for June 2025 and structural benchmarks due between June 30th and December 30th, 2025, alongside continuous structural benchmarks.
- Examples of metrics: floors on tax revenue, the primary balance, social spending, and maintenance of cost recovery for energy.
- Key structural benchmarks and reforms to advance before the 5th review:
- Repeal of SVAT (the simplified VAT).
- Implementation of the tax exemptions framework amendments (STP and Port City Acts).
- Review and possible adjustment of the electricity tariff methodology, with technical assistance.
- Ongoing SOE governance reforms and customs reforms, including the new structural benchmark on customs under the 4th review.
- Preparation and alignment of the 2026 budget with program targets and revenue/expenditure objectives.
- Process:
- A staff visit will set the agenda and tone for the 5th review discussions.
- IMF and Sri Lankan authorities will jointly determine program targets and appropriate reform measures for the period ahead.
Transcript of IMF press briefing on the IMF Executive Board completion of Sri Lanka’s 4th review under the Extended Fund Facility, July 3, 2025.