Transcript

Press Briefing Transcript: IMF Executive Board Completes Fourth Review of Sri Lanka’s Extended Fund Facility

July 3, 2025

PARTICIPANTS:

Evan Papageorgiou, Mission Chief for Sri Lanka, IMF

Martha Tesfaye Woldemichael, Resident Representative in Sri Lanka, IMF

MODERATOR:

Randa Elnagar, Senior Communications Officer

*  *  *  *  * 

Ms. Elnagar: Good morning, everyone and to those joining us from Washington and good evening to those who are joining us from Sri Lanka and Asia.
Welcome to the press briefing on the 4th review for Sri Lanka's Extended Fund Facility. I am Randa Elnagar of the IMF's Communications Department. Joining me today are two speakers, Evan Papageorgiou. He's the mission chief for Sri Lanka and Martha Tesfaye Woldemichael, IMF's resident representative in Sri Lanka.
To kickstart our briefing today, I would like to invite Evan to deliver his opening remarks. Then we will be taking your questions. Evan, over to you.

Mr. Papageorgiou: Thank you, Randa. Hello everyone. Good evening to all of you in Sri Lanka and thank you for joining us today for this important press conference. My name is Evan Papageorgiou and as Randa also said, I am the IMF Mission Chief for Sri Lanka.

I'm also joined by our Resident Representative in Colombo, Martha Woldemichael. So, I'm happy to reconnect with all of you and to tell you a bit about our latest news on Sri Lanka. So, I'd like to take a few minutes to make some introductory remarks.
And then Martha and I will be happy to take your questions.

OK, so today I am happy to report that on July 1st the IMF Executive Board completed two very important board meetings for Sri Lanka. First, the Executive Board granted the Sri Lankan 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. And I will get back to this in one second to explain what this means.

Second, the Board completed the 4th review under the Extended Fund facility for Sri Lanka, and this allows the Sri Lankan authorities 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 it represents a significant milestone in the country's efforts to durably restore macroeconomic stability.

The performance under the program in the 4th review has been generally strong, with some implementation risks being addressed.

There were two prior actions for this review and the authorities met both of them. The first was about restoring cost recovery electricity pricing for the remainder of 2025; and the second one was to operationalize the automatic electricity tariff adjustment mechanism. It's important to note that all quantitative targets for the end of March 2025 were met as well with the exception of the stock of expenditure arrears, which I can say a bit more in one second, and that's related also to the first board meeting.

Furthermore, all structural benchmarks due by end of May 2025 were either met or implemented with a delay and which demonstrates a commendable commitment to the to the reform agenda.

Now, as we reflect on the progress made, it is essential to recognize the significant achievements under the program and under the ambitious reform agenda. The rebound in growth in 2024 and so far in 2025 reflects a broad and strong recovery amid rising confidence among consumers and businesses. The improvement in revenue performance with a revenue to GDP ratio climbing to 13.5% in 2024 and continue to climb in 2025 from 8.2% in 2022 is a testament to the successful implementation of these reforms.

Looking ahead, the economic outlook for Sri Lanka remains positive. We have observed that inflation in the second quarter of 2025 continues to be below the central bank inflation target, largely due to electricity and energy prices, but even there there's good news in that it's coming back closer to target. Additionally, Sri Lanka has signed bilateral debt restructuring agreements with Japan, France and India, bringing the debt restructuring near completion, which is critical for restoring fiscal and debt sustainability.

Now it's important to also note that the authorities must remain vigilant. The global economic landscape presents substantial challenges, particularly due to uncertainty surrounding global trade policies. If these risks materialize, we are committed to working closely with the Sri Lankan authorities to assess their impact and to formulate appropriate policy responses.

Sustained revenue mobilization is critical to restoring fiscal sustainability and creating the necessary fiscal space. Strengthening tax exemption frameworks and boosting tax compliance along with enhancing Public financial management are vital steps in ensuring effective fiscal policy. There's also a need to further improve the coverage and targeting of social support to the most vulnerable members of society.

A smoother execution of capital spending within the fiscal envelope would help foster medium-term growth. Establishing cost recovery, electricity pricing and automatic electricity tariff adjustments are commendable and should be maintained in order to contain the fiscal risks. All these actions are essential to ensure that the energy sector remains viable and can support the country's economic growth.

Monetary policy must continue to prioritize price stability, supported by sustained commitment to safeguard Central Bank independence. Greater exchange rate flexibility and the gradual phasing out of administrative balance of payment measures remain critical to rebuilding external buffers and enhancing economic resilience. In addition, resolving non-performing loans, strengthening governance and oversight of state-owned banks and improving the insolvency and resolution framework are vital to reviving credit growth and supporting private sector development.

Finally, structural reforms are crucial to unlocking Sri Lanka's potential. The government should continue to implement governance reforms and advanced trade facilitation reforms to boost export growth and diversification of the economy.

Now let me also take a moment to explain the first board meeting decision. So in the course of regular staff review of the budget appropriation for this year and inadvertent under reporting of data for government expenditure arrears was identified. This under reporting on the stock of arrears means that the quantitative performance criterion relating to the stock of government expenditure arrears, which had a ceiling of zero, was missed in the last three reviews and gave rise to a breach of the authority's commitment for the provision of accurate data. We worked very closely with the authorities to provide corrected data, and the authorities have undertaken several corrected measures to report and make progress in clearing the existing arrears. The authorities also committed to improve their processes and practices aided by technical assistance that we will provide. The IMF Executive Board considered all this evidence and approved the authority's request for a waiver of non observance of this quantitative performance criteria on arrears that was missed.

OK, let me conclude here by commending the Sri Lankan government and Sandra.
Bank for their sustained commitment and to the program objectives. These put the country on a path towards robust and inclusive growth. We, the IMF, remain dedicated to supporting Sri Lanka in safeguarding its hard won games and navigating the road ahead. Thank you. I will pause here and then Martha, I now look forward to your questions. Randa, back to you.

Ms. Elnagar: Thank you. Thank you, Evan. Colleagues, I'm asking you to please put on your camera, raise your hand, identify yourself and your news organization before asking your questions. We are going to group your questions. So we're going to take three at a time or two at a time. Just if you don’t mind, to  chance to your colleagues, we are going to take one question per person. So we’ll start please go ahead.

QUESTIONER: Thank you. Thank you, Evan. Thank you, Randa. My question is when you mentioned about the underreporting of data, can you elaborate on what areas that the government had underreported this data and what proposals that the government has given for the government to move forward with the program on data submission.

Ms. Elnagar: Thank you. Colleagues, I'm asking you to please mute if you're not speaking. There is going to be an echo and please identify yourself and your organization.

QUESTIONER: My question is the government took steps to increase the electric tariff based on IMF advice or recommendation. So currently people are under pressure due to the tax burden and the cost of living. Why are you imposing more burden on the people? Is that fair?

QUESTIONER: My question is also linked to the previous one. It's about the taxation. Now tax regime is one of the major areas of concern during this whole IMF process. So what what's your assessment of the current status of Sri Lanka's taxation and the process of whether it's successful or whether it's satisfied for your end.

Ms. Elnagar: Thank you so much.

Mr. Papageorgiou: Thank you, Randa. So first of all, on the on the inaccurate data. So let me give you a little bit more detail here. So in the course of a regular review that we as staff undertook with the authorities during going over the budget appropriation, we identified an inadvertent under reporting of of data.
This one source of these arrears was due to the previous interest subsidy scheme for senior citizens. That was the one that ran out in end of 2022.  Now I should mention that the data part of that data that was released was also the outstanding liabilities were also published by the authorities on a separate report by the Ministry of Finance, but they were not reported to the Fund. And so this, and some other schemes that we were discussing with the authorities, alongside with some other weaknesses in the timely reporting of outstanding liabilities and by line ministries to the Ministry of Finance created a misunderstanding by the authorities on the definition of arrears under the technical memorandum of understanding of the program. So the combination of these created an under reporting on the stock of of arrears, which means that under the QPC under the Quantitative performance criterion was missed in the last three reviews. The first review, the second review and the third review, which gave rise to a breach of the authorities commitment for the provision of accurate data.

As I mentioned also in my introductory remarks, we worked very closely with the authorities to rectify the issue, to provide the corrected data on these arrears. And the authorities have indeed undertaken several corrective measures in the interim. Since we started discussing this, they have started reporting to us the full stock of arrears that have been accumulated.

And they have made progress in putting a plan to clear these existing areas. The authorities also committed to improving the processes and practices in keeping track of these areas going forward, and as I mentioned, we will also help with technical assistance. I should also mention, which is very relevant here, is that these are years were already being cleared. There was a lot of clarity from the side of the authorities.
Into what was owed to whom. It's just that it was not reported properly to the Fund under the program requirements. So, when we presented all this evidence to the Executive Board under the Managing Director's recommendation, the board approved the authorities request for a waiver of this non-observance of this quantitative performance criterion and so this allowed the 4th review now the one that we're talking about now to be approved. So hopefully that answers your question.

The second question on electricity tariffs. Yes. So obviously that's an ongoing discussion that we've had for you know we also discussed in the back the staff level agreement. And the cost of living is obviously a very important question, very, very important side question of this. So let me just say one important thing here. Cost reflective electricity pricing is one core part of how the utility company and the regulator PUCSL see it as appropriate and this is also adopted by the government. It's also one of the building blocks of the IMF program. So maintaining cost recovery, electricity pricing is very important for containing the fiscal risks and supporting long term economic stability, which ensures that the utility company operates on a commercial ground and doesn't become a burden for taxpayers, provide stable and predictable electricity pricing and so on. And all these are good outcomes. Now you know in terms of the cost of living and we know the impact that this has.

So first of all, it's important to understand also that there is differentiation in the pricing of electricity for different households and different levels of income. So there is already some, by consumer category in other words. So for residential customers, the tariffs are lower for small consumers and increases progressively with the.
consumption level. Therefore, larger consumers of electricity cross subsidize smaller consumers and so the average tariff level is adjusted quarterly to ensure that this financial availability of CB. Also, gives a nod, a strong nod to the differentiation.
But beyond that, obviously, the IMF program has provisions to protect the poor and the vulnerable. So we think that this is an appropriate course of action.

On the taxes from the question on revenue and associated other issues. So obviously you know it's very important that there is a revenue based fiscal consolidation. So tax revenues have risen considerably between the beginning of the program or even earlier between 2022 and 2024. In this year's budget in our forecast as well, we target tax revenues of a little bit less than 14%, about 13.9% of GDP and a primary balance of 2.3% of GDP. So the overall fiscal deficit, the deficit that includes the interest payments has been shrinking between 2020 and 2024 in line with the program projections. So I think there is good progress and we think it's very important to continue sustaining this reform momentum and continue building on this on this hard won gains. So I'll pause here and I'll give it back to you, Randa. Thank you.

Ms. Elnagar: Thank you, Evan. Please ask your question and identify your organization. Thank you.

QUESTIONER: Thank you. I have two questions. There's a sentence in the staff report saying: going forward, authorities need to amend previous tax exemption framework commensurate to the economic value they provide. I saw that there's Port City Act and STP Act you are going to amend. When you're saying previous, is it going to change any taxes already given to companies or is it just the framework that is in existence? And another question regarding the PUCSL and the electricity, I saw that the formula is going to be changed. But also this question of cross subsidies, our cross subsidies are like very wide between industry and service, and even like it's almost like de facto taxation kind of thing. So is there any attempt to reduce the cross subsidies and make it a more transparent Treasury subsidy instead  of
charging various customers very wide, widely differing prices by type of industry, for example.

Mr. Papageorgiou:  Thank you. Randa, let's take one more question. These are two questions, so let's take one more. Yeah.

Ms. Elnagar: Yes.

QUESTIONER: Thank you, Randa. Evan, my question is you mentioned governance reform that it must continue. Could you give us sort of an idea of how the IMF rates or looks at the reforms conducted so far and going forward, what are the other key areas? Or levels of reform that you say must be undertaken, particularly in view of the sort of governance, diagnostic and the sort of key sort of importance that was identified in in working on governance on corruption and things like that. Thank you.

Ms. Elnagar: I see your hand. Evan is going to answer these questions and then we're going to get back to you. Thank you.

Mr. Papageorgiou: Thank you, Randa, and thank you. Why don't I have Martha coming into the governance reform part of the question and I'll answer the one on tax exemptions and the PUCSL and the cross subsidies. OK, so obviously, on the tax exemptions. So thank you for the question and for the clarification. So let me say one second before I answer the question; let me just say one important thing. Granting ad hoc, non-transparent and large tax exemptions in the past has created these significant issues that we have noticed, both obviously on the fiscal and the revenue, which created significant losses in foregone revenue for the government and for the Sri Lankan people but also has given rise to corruption vulnerability. And so, the reason why we think that the revision of the tax exemption frameworks is a key cornerstone because the authorities have also committed to refrain from granting tax exemptions until the new tax emption framework is updated to meet best practices, in line also with technical assistance. So, under the IMF program, we have structural benchmarks to amend the STP Act by the end of August and the Port City Act by the end of October as well as the associated regulations driving or spelling out the exemptions. And so, on the back of that there should be transparent and rules-based eligibility criteria to limit the duration of tax incentives, for example. And so, what we have asked is until then the authorities should commit to a continuous structural benchmark which requires them not to provide new exemptions to businesses based on the STP and the Port City Acts and regulations, and the authorities have agreed and have shown strong commitment to this so far now.

The recommendation is to amend the STP and the Port City Acts going forward, so there shouldn't be any more exemptions under the existing frameworks and going forward they should be amended and any new exemption should be given under the new frameworks, not the old ones. And it's important to note that the tax exemption should not be the primary tool for attracting foreign investment. I think we mentioned this several times. There should be policy continuity and to reduce uncertainty by having a well-defined tax exemption framework that is going to last. On PUCSL formula. Yes, that is something that we discussed in great detail with the authorities and with the utility company PCB and PUCSL, the regulator.
We will discuss this in greater detail in the 5th review and we're also providing technical assistance on evaluating the formula and examining whether there's a need for any adjustments there. There's technical assistance that will be completed by November.  And the authorities will take a look at this. On the cross subsidies, you're right. There is a very wide cross subsidy practice. That would be something that we could also examine obviously within the new Electricity Act and the amendment rather to the Electricity Act, but maybe scope to examine other things and we were talking to our development partners, to the World Bank, ADB and others as well as to our partners to see the scope of considering this as well. Let me pause here. I'll pass it on to Martha for the governance reform questions.
Thank you.

Ms. Woldemichael: Thank you, Evan. So, I think you can say that Sri Lanka has already taken major steps in terms of strengthening governance and also advancing the anti-corruption agenda. I can mention the important milestones that were achieved when the government enacted key legislation. So, I 'm thinking about legislation for safeguarding the independence of the central bank, for improving public financial management and also for strengthening the legal framework for anti-corruption through The Anti-Corruption Act. And as you know, in 2023 Sri Lanka became the first country in Asia to undergo the IMF’s Governance Diagnostic assessment, and some of the recommendations of this assessment were embedded in the IMF program, given how critical they are to achieve the objectives of the EFF, in terms of reducing corruption vulnerabilities. One example I can give here is the requirement to publish public procurement contracts and also the requirement to publish the list of firms that are benefiting from tax exemptions. More recently, in addition to all of these, the government published an action plan on governance reforms. So, this was end-February. It was actually a structural benchmark under the EFF program and many of the action items that are being considered in this government action plan are aligned with the recommendations of the IMF Governance Diagnostic assessment. So, for instance, enactment of the asset recovery law was a structural benchmark under the EFF program that the authorities met. For the forward-looking part to address your question, I think we would hope to see continued emphasis on improving governance. Having the government effectively implement their action plan on governance is going to be critical.
But more broadly speaking, under the EFF program, the authorities are taking steps to strengthen the asset declaration system, as well as the tax exemptions framework that Evan mentioned as well. AML/CFT is also something they're looking into.
They are also prioritizing anti-corruption reforms at customs. We have a new structural benchmark that was included in the program under the 4th review that was just completed. They're also working on strengthening procurement processes in order to reduce revenue leakages. So, I I hope this gives you an overview
on governance. Thank you very much. Randa, over to you.

Ms. Elnagar: Thank you, Martha. Thank you, Evan. Mindful of the time, we're going to take the last two questions.

QUESTIONER What at are the key milestones Sri Lanka must meet ahead of the 5th review and, second one, some key SOEs are still lost making. Is IMF satisfied with the steps taken to restructure these institutions?

Ms. Elnagar: The last one - what are the conditions that Sri Lanka should achieve or should follow to or implement to reach the 5th review. These are the two questions and after that we're going to wrap up. Thank you.

Mr. Papageorgiou: The questions are very similar, so I'll answer them together. The second question was about SOE. I couldn't hear you very clearly, but I hope I got the gist of it. But you can let us know in the chat, maybe.

So, milestones and criteria and conditions for the 5th review. Obviously, it's a bit early. We just finished the 4th review. We have a little bit of time ahead of us. First, we have a staff visit to meet the authorities to discuss a lot of the upcoming issues and that will set the tone on what we will be discussing for the 5th review.
But there is a set of standard issues that we always look at every review and the 5th review will be similar. So, we have both backward and forward-looking components in the review. In other words, we will need to assess the recent economic developments and program performance by looking at quantitative targets and structural benchmarks and then, looking ahead, we will be looking at the economic outlook together with the authorities, jointly, determine the program targets and appropriate reform measures for the period ahead.

For the 5th review, obviously we will have to evaluate the quantitative targets such as quantitative performance criteria and indicative targets for June 2025. That will be the test period and the structure of benchmarks that are due between June 30th of this year and December 30th of this year, as well as the usual continuous structural benchmarks and quantitative targets. I think you all know what these are, but by way of example, floors and tax revenue or the primary balance or social spending and so on.

And then on the structural front, we have illustrated and have highlighted in this reform, we have a lot of structural benchmarks on key reforms such as the repeal of SVAT (the simplified VAT), the tax exemptions framework that we discussed a little earlier about the STP and Port City, the review of the electricity tariff methodology jointly with other partners as well, and then ongoing work on SOE governances and customs. We will also assess the observance of the continuous structure benchmark on maintaining cost recovery for energy, for electricity.

Obviously one important one will be the 2026 budget which is coming up. The discussions are coming up. This is a very, very important part of the of the program. And we will ensure that revenue and expenditure and all the targets are met in accordance to the program and also in accordance to the authorities’ targets. As obviously as Martha also mentioned, there will be more work on governance reforms, which is always very important as well as. Discussions on monetary policy and reserves and everything else I think are all well defined by now.

On the issues of SOEs – SOEs and the governance of SOES in general - has been an important [part] and at the forefront of the program. A lot of them are in connection to resolving legacy debt and implementing cost recovery pricing for both electricity and fuel, which essentially would create a better run set of companies as well as reducing the fiscal risks from the SOE to the government, as contingent liabilities get reused. We have spoken to this in different terms, but this would mean the cost recovery pricing of energy, electricity, and fuels, containing the risk from guarantees to SOES; refraining from new FX borrowing to non-financial SOEs; and making SOES more transparent by publishing their audited financial statements of the of the 52 largest SOEs

That will be just a general overview, but we look forward to doing more, working more, and covering more ground here. Thank you, back to you.

Ms. Elnagar: Thank you very much, Evan, Martha, and our colleagues who participated in this call. We come to the end of our press conference. The video recording and the transcript will be posted on imf.org. And thanks to everyone for joining us today. We look forward to seeing you in the future.