October 21, 2023
PRESS OFFICER: Huong Lan Vu
Phone: +1 202 623-7100Email: MEDIA@IMF.org
PARTICIPANTS:
Moderator:
HUONG LAN “PINKY” VU
Communications Officer
Speakers:
PETER BREUER
Senior Mission Chief for Sri Lanka
KATSIARYNA SVIRYDZENKA
Deputy Mission Chief for Sri Lanka
SARWAT JAHAN
Resident Representative in Sri Lanka
MS. VU: Hello. I guess we can get started now. Good morning to those in Asia and good afternoon, good evening to those who are joining from other parts of the world. Welcome to the IMF's Press Briefing on the First Review mission under the Extended Facility Fund Arrangement for Sri Lanka. My name is Huong Lan (Pinky) Vu, Communications Officer at the IMF. And today I'm delighted to be joined by three speakers from the Asia and Pacific Department at the IMF. Peter Breuer, Senior Mission Chief for Sri Lanka, Katsiaryna Svirydzenka, Deputy Mission Chief and Sarwat Jahan, Resident Representative in Colombo.
By now you should have seen the press release which was posted on imf.org a couple of hours ago. And in this briefing, we'll have an opportunity to delve into some of the issues discussed in the press release. To commence the briefing, I would like to invite Peter to give some opening remarks and then we'll take your questions. And please kindly keep your microphones muted throughout the briefing, unless when you are speaking. So, with that, Peter, the floor is yours.
MR. BREUER: Thank you very much, Pinky. And hello and good morning. Good evening from Washington. Thank you for joining us for this Press Briefing here today. It is good to see many of you here virtually.
Following constructive discussions in Colombo in September, in Marrakech, in October, during the annual meetings of the IMF, and virtually since then, the IMF has reached staff level agreement with the Sri Lankan authorities on the first review under their economic reform program supported by the IMF's Extended Fund Facility Arrangement. The agreement is subject to approval by IMF management and its Executive Board in the period ahead, and it is conditional on two things.
First, the implementation by the authorities of all prior actions, and second, completion of the so called Financing Assurances Reviews, confirming that sovereign debt is being restructured in a timely manner and in line with the program's debt targets. Upon approval by the IMF Board, Sri Lanka will have access to about $330 million, bringing the total IMF financial support dispersed to about $660 million out of roughly 3 billion that would be available over the four-year life of the program.
The ambitious reform agenda is starting to bear fruit, with rapid disinflation and fiscal revenue rising from very low levels. Program performance at end June was satisfactory. All quantitative performance criteria were met except on expenditure arrears, and all indicative targets were also met except on tax revenues. Most structural benchmarks were either met or met with delay. Notably, the authorities published on time the Governance Diagnostic Report, making Sri Lanka the first country in Asia to do so.
The economy is showing tentative signs of stabilization, but growth momentum remains subdued and economic recovery is not yet assured. Sri Lanka's external position weakened as a result of several factors, including slow progress on debt restructuring and reserve accumulation slowed in recent months. Agreeing on debt treatments consistent with restoring debt sustainability quickly will be key to resolving uncertainty that is constraining Sri Lankan businesses and external financing. Sustaining the reform momentum is needed to achieve stable and inclusive economic recovery. We welcome the Authority's commitment to increase revenues, improve governance and tax administration, and actively eliminate evasion.
Cost recovery in energy pricing helps mitigate fiscal risks from state-owned enterprises. Further strengthening the social safety net is critical to protect the poor and the vulnerable. While inflation decelerated, continued monitoring is needed to anchor expectations. Rebuilding external buffers through strong reserves accumulation remains an important objective of the program. We also welcome the authorities’ commitment to implement key recommendations of the Governance Diagnostic Report. Concrete steps towards addressing corruption risks and strengthening accountability will build confidence and make growth more robust and inclusive.
Following the domestic debt operation, the critical next step is to secure an agreement with official creditors on a debt treatment consistent with program parameters and debt targets. We took note of a tentative agreement between Sri Lanka and the Export Import Bank of China and will analyze the details when we receive them. We urge all official creditors to move forward and agree on an appropriate debt treatment in line with the financing assurances they provided.
We also understand negotiations between commercial creditors and Sri Lankans are ongoing and emphasize the need to restore debt sustainability in a robust manner. Delays risk worsening the economic outlook for Sri Lanka, widening its financial gaps, hindering its return to sustainable growth, and thereby reducing its capacity to pay.
Let me conclude by thanking the authorities for the excellent collaboration during the mission. Thank you. Back to you, Pinky.
MS. VU: Thank you, Peter. So now we'll open the floor for questions. If you would like to ask a question, please raise your virtual hand and then I'll call on you. And yeah, please be reminded to keep your microphone muted all the way unless you are speaking. And when you are speaking, please turn on your camera, introduce yourself and your news organization.
With that, I would like to open the floor for questions. Please raise your hand if you would like to ask a question. Yeah, Shihar, please. Shihar, your audio is breaking up.
QUESTIONER: Yeah, can you hear me?
MS. VU: Yes, we can hear you now.
QUESTIONER: Yeah. The IMF has been strongly recommending some anti-corruption measures from the day one. I just want to check the progress because what we hear from the government official is IMF was not happy about the measures so far taken on the anti-corruption part. Could you comment on that, please? Thanks.
MS. VU: Thank you. I think we'll take a few more questions and then the team will address them altogether. Do we have more questions from the room? Asantha, please.
QUESTIONER: Hello. Yes, could you give us some idea about the prior actions that we had to do and also whether the budget is a prior action and how the recent rejection or like the reply sent by Sri Lanka to the bondholders, whether that will affect the review.
MR. VU: Okay, I think we'll take one more question. Hanada from Nikkei. Please.
QUESTIONER: Good morning. I just would like to ask about the impact of the Chinese authority. Just a few days ago Sri Lanka and Chinese Export Import Bank say that they reach to some key principle of the agreement of the debt restructuring process. Is this latest IMF decision was impacted by this kind of the Chinese action?
MS. VU: Thank you. Yeah, I would like to invite Peter and the team to address the questions.
MR. BREUER: Thank you so much for your interest. So, a number of different questions. Well maybe let's start with the question on the prior actiosn because it gives me also an opportunity to clarify that the details of what was agreed will be made transparent when our staff report is published after the IMF Executive Board had the opportunity to consider it.
But nevertheless, as you would expect, the conditionality focuses on achieving the objectives of the program including raising revenues and mitigating fiscal risks and ensuring strong governance reforms and safeguarding financial stability. So really there are no surprises there. And just like approximately 12-months ago we are of course looking for a strong budget that can achieve that with of course the objective being that the gap between expenditures and revenues needs to be narrowed so that Sri Lanka can once again find creditors who are willing to finance the remaining gap.
On the anticorruption measures, well, I think it should be noted as I said in the opening remarks, the publication of the Governance Diagnostic on time, that was a structural benchmark under the program that has been met. It is an important moment. It is the first governance diagnostic to be published in Asia and it contains a whole host of recommendations. So, implementing those recommendations of course will be important going forward and we have discussed that with the authorities, and they will be working on an action plan on how to implement some of these key recommendations including as part of the program.
The third question on -- was the news from China that there's an agreement between Sri Lanka and the China EXIM Bank. Did that have an impact on now reaching staff level agreement? And the answer to that is no. The staff level agreement is the outcome of having agreed between the IMF staff and the Sri Lankan authorities on a set of strong measures that will help achieve the objectives of the program in the various areas. Revenue-based fiscal consolidation, strengthening the social supports to the poor and vulnerable, financial stability, debt sustainability, all these objectives.
Reaching debt sustainability is a separate track. The authorities are engaged with their creditors in finding debt treatments that would help restore debt sustainability in line with the debt targets under the program. And so that is the second leg of activity that needs to be brought forward in order for us to be able to present the review to the IMF Executive Board. Let me stop there. Thank you.
MS. VU: Thank you, Peter. We'll go to the second batch of questions now. Indika and then Meera will be next. Indika, please.
QUESTIONER: Hi, can you hear me? Pinky?
MS. VU: Yes.
QUESTIONER: Yeah. Thank you. I have two questions. When is the staff agreement is expected to be taken up by the IMF Executive Board for consideration for approval? And the other one is, are there any new pledges or commitment made by the Sri Lankan authority with regards to revenue mobilization to -- yeah?
MS. VU: Thank you, Indika. And Meera, please.
QUESTIONER: Yeah, thank you. I have two questions. So, you observed that the critical next step is to secure an agreement with the official creditors. And you've taken note of this tentative agreement between Sri Lanka and the EXIM Bank of China. And yesterday, the Chinese EXIM has also assured President Wickremesinghe of support.
But could you please tell us what this means in terms of debt treatment? Because on the one hand, you have the Paris Club led creditors committee where India and Japan have been keen on creditor parity. And on the other we see China and Sri Lanka bilaterally negotiating debt treatment, but we don't know the specifics of the negotiations.
So, does the IMF have a role in ensuring creditor parity and transparency in finalizing the debt treatment plan? And how are you really monitoring these two aspects? That's my first question.
The second is you have commended a series of measures by the government, including rapid disinflation. So, while inflation has reduced to some extent, although it's over and above last year's inflation, the cost of public utilities are steadily rising. Even today, we're expecting a hike in electricity tariff. You also underscore social safety net, but within Sri Lanka there's a lot of concern about who gets excluded in the current policy. So, are you also thinking about who is really bearing the cost of the IMF program within Sri Lanka? How are you addressing those concerns? Thank you.
MS. VU: Thank you, Meera. I think we have enough questions for the second batch. So, Peter, please.
MR. BREUER: Yes, thank you very much. So let me start by the early questions and then maybe Sarwat can come in on the latter question. So, with respect to when the Board, the IMF Board, can take up consideration of the first review for Sri Lanka, really two things need to happen before we can present the staff report to the Executive Board. The first is the implementation by the authorities of the prior actions that have been agreed in line with the objectives of the program. And then the second is the completion of the so-called Financing Assurances reviews, which includes confirming whether adequate progress has been made with debt restructuring to give confidence that this restructuring will be concluded in a timely manner and also in line with the program's debt targets.
And that actually also is a cue to answer the question on, sort of, what is the IMF's role in debt restructuring? Our role is we want to be sure that debt sustainability is being restored in Sri Lanka. This is essentially defined through the debt targets that were set in the program when the program commenced in March. So, these are targets with respect to the debt stock and with respect to the debt service in domestic and in foreign currency, and also with respect to the debt relief that's needed within the program period. So, we will be monitoring whether the treatments that are being agreed are compliant with those targets.
Now, Sri Lanka has committed to follow the principle of parity and transparency and those are principles that are very important for creditors to decide to participate in the restructuring. And so hence they are of interest to the IMF on a secondary basis.
Well, there is a question on measures with respect to revenue mobilization, maybe if Katya wants to tackle that one. And Sarwat, do you want to go ahead on the last one with respect to social safety net? Sarwat?
QUESTIONER: Sure, Peter. On the social safety net, I would like to highlight that a core pillar of the program is to protect the poor and the vulnerable from the adverse impact of the crisis by raising the social spending floor and also by improving the targeting of the beneficiaries. With the aim of improving targeting, the authorities have developed a social registry to ensure that cash transfers are given only to those that deserve it by qualifying through the eligibility criteria.
Now, this social registry is meant to be dynamic. Therefore, anyone who believes that they have been excluded or placed in the incorrect category are encouraged to file grievances. And we understand that there have been quite a bit of grievances that are filed. But it is through this procedure that the authorities can take remedial measures to correct for any errors that may have been made. And we have continuously engaged with authorities and recommended strengthening of the social safety net by improving targeting, adequacy, and coverage. So, we do encourage Sri Lankans to engage with the authorities to let them know if they feel that they have not been included in the registry. Katya, would you?
MS. SVIRYDZENKA: If Peter doesn't mind, there was also a question about the electricity prices, so maybe I can take that because that also is relevant to the question on the social safety net. And there we would like to emphasize that sudden electricity recovery is crucially important to eliminate financial losses in the electricity sector because at the end of the day, that becomes a burden on the taxpayers, including on those who are poor and vulnerable.
So, it's one of the key elements of the Fund supported program in Sri Lanka. At the same time as Sarwat has highlighted, the impact of the tariff hike on the poor should be mitigated by the strong social safety net. And in addition to that, Sri Lanka should implement structural reforms to make the electricity sector more efficient and improve the governance of state-owned enterprises more generally. That should lower the cost of electricity in the medium and long term. And that's something that the authorities are working on.
Now, on the revenue measures, the authorities are making good progress in response to revenue measures. As you have seen in the press release we put out, we expect that the revenue mobilization will fall short of projected by the end of the year by 15 percent. At the same time, the authorities are working on compensating measures. And the next steps in the program will be more in the tax administration domain to ensure there's no evasion, to broaden the tax net to make sure that's more equitable and everyone pays their share in terms of raising revenue so that the social safety net could be adequately financed. I'll stop here.
MS. VU: Thank you. Now we go to Ronojoy, please.
QUESTIONER: Hello? Am I audible?
MS. VU: Yes, we can hear you.
QUESTIONER: All right, thank you. So, I'm Ronojoy from Bloomberg. I wanted to understand, in terms of the Financing Assurances reviews, what kind of developments and outcomes would constitute adequate progress for the IMF?
MS. VU: Thank you. We'll take a few more questions before the team can respond. Zulfick, please. Zulfick, are you there? You are on mute.
QUESTIONER: Hi, good morning. Can you hear me?
MS. VU: Yes, we can hear you.
QUESTIONER: Hi. My question is basically, we've seen the program that Sri Lanka has got. There were concerns that there is a delay in implementing the program or coming into certain agreements. However, there were also comments being made, especially in Marrakech during the Annual Meetings, that Sri Lanka's program was actually faster than the other programs, compared to the other programs that were given to other countries. Could you please elaborate on that process, on the delivery of the program given to Sri Lanka, as well as on any other development surrounding the debt restructuring process?
MS. VU: Right. Thank you. Asantha, we still can see your hand raised. Is it an old hand or a new hand? Do you want to come in now? Do you still want to come in?
QUESTIONER: I think it's the old hand. But my old question about whether budget is a prior action, I didn't get a clear answer.
MS. VU: Okay, so your question is whether the budget is a prior action. Thank you. Yeah. Peter, would you like to take it?
MR. BREUER: Thanks so much. On financing assurances review, so what constitutes adequate progress? Essentially, we need to see a clear path to restoring debt sustainability in Sri Lanka. The Financing Assurances Review focus on whether adequate progress has been made with the debt restructuring and whether we can have confidence that debt treatments, in line with these debt targets that I described, will be concluded in a timely manner. So, really, the objective here is to see Sri Lanka on a clear path towards restoring debt sustainability.
With respect to the question on sort of that, Sri Lanka is sort of on a faster track. So, what I recall that was being mentioned in Marrakech is that there was a discussion about, generally, how quickly financing assurances can be secured. And so, there was a comparison across countries. You may recall that, in recent history, since, let's say, COVID, quite a number of countries had to restructure their debt, like Chad and Zambia, Sri Lanka, Ghana, roughly speaking, in that chronological order, and the time it has taken to secure financing assurances for these countries has become less and less.
So, I think it was in this context that Sri Lanka was mentioned, where you remember the staff-level agreement for the program was reached on September 1st, 2022. And then, the program was considered by the Board, by the IMF Executive Board, on March 20th, 2023. So, that was quicker than, for example, in the case of Zambia and Chad, and then Ghana, which followed Sri Lanka, was a tad quicker than that as well. So, it was basically highlighting that the discussions at the Global Sovereign Debt Roundtable have had an impact in the field when it comes to debt restructuring processes, that these are moving along a little bit more quickly.
And then, there's the question with respect to the budget. So, as I said at the outset, the exact prior actions and structural benchmarks will be made clear to you and your audiences when the staff report is published, after it has been considered by the IMF Executive Board. So, at the moment, these details, I can't get into too much detail, but, as I mentioned, there are no real surprises in the sense that all of them are about achieving the program's objectives. And in particular, for example, with respect to revenue, you will recall, as Katya mentioned, there was a shortfall in 2023. So, clearly, the objective is to not let that happen next year and to make up for that shortfall.
So, one of the objectives is to get to a revenue that exceeds 12% of GDP, and accordingly, measures will have to be implemented to achieve that objective. As you recall, Sri Lanka is a country with one of the lowest taxes in the world, and that was a key contributor to the crisis, especially when taxes were lowered even further in 2019, and then, shocks hit, the country couldn't handle it. And so, that was a key contributor to the crisis. The program is all about addressing the root causes of the crisis. Raising revenue is a key element of it. Thank you.
MS. VU: Thank you, Peter. I think we have time for one more round of questions, and I think there are few people who have follow-up questions. So, Hanada, do you want to come in?
QUESTIONER: Okay, thank you. Let me confirm, just in case, regarding my previous question. So, yesterday, Sri Lanka government also announced that Chinese Finance Minister assured extensive commitment to Sri Lanka credit optimization, and did it also have no impact on the staff level agreement? I just quickly confirm about that point.
MS. VU: Okay. And, Dinesh, do you want to come in?
QUESTIONER: Will there be any sort of fast-tracking of the revenue proposals, like the wealth tax. Is that going to -- or the inheritance tax is going to come in the next budget.
MS. VU: Thank you. Ronojoy, we still can see your hand as well. Do you have a follow-up question? Okay, maybe not. Right, Peter, so over to you, please.
QUESTIONER: Sorry, sorry. I meant to unmute but I was late. I do have one follow-up question.
MS. VU: Yes, please.
QUESTIONER: Can I go ahead?
MS. VU: Yeah, please go ahead.
QUESTIONER: So, there are some critics of the IMF's approach with Sri Lanka who kind of argue that the Sri Lankan authorities have been acting in very good faith, and the treatment or approach for IMF has still been maybe more stringent than in the case of other countries, who maybe either are serial defaulters or have had less of a good track record with IMF programs in the past. Just curious if you have anything to share addressing that kind of line of criticism.
MS. VU: Okay, thank you. I guess we don't have any more questions from the room, so yeah. Over to you, Peter.
MR. BREUER: Yeah, thank you. Pinky, the middle question, fast-tracking revenue proposals, I'm not sure I got that completely.
QUESTIONER: (Inaudible) mentioned an inheritance tax. Is that going to come in the coming budget? Because you were just speaking about revenue being short and trying to raise revenue.
MR. BREUER: The audio is very broken down, so I can't quite hear the question. Some kind of a tax?
MS. JAHAN:Peter, if I may clarify, I think the question was that there is property tax and wealth tax that we had during the program negotiations, and it is in our staff report. The question is whether, in this upcoming budget, those taxes will be advanced.
MR. BREUER: Okay, thank you. Thank you very much.
So, the first question on did -- sort of comments by Chinese officials or the visit by the Sri Lankan President to China have an impact on staff-level agreement? No. As I mentioned, staff-level agreement is the result of discussions between the Sri Lankan authorities and IMF staff on a set of measures and reforms that are needed in order to achieve the program's objective. So, this is all about the domestic reform agenda of the authorities, and pronouncements by other officials do not have a bearing on that.
So, of course, when it comes to the debt negotiations, then moving towards debt treatments that will restore debt sustainability will be important steps with respect to completing these financing assurances reviews that I mentioned.
On the question that (inaudible) kindly clarified for me, or for us, property tax is something that is in the program, but not quite yet, because it's recognized that this is something that takes a lot of time to put into place, and it is, in fact, important for the Sri Lankan authorities to make preparations for that. And, in fact, the IMF is also providing some technical assistance in that regard. So, it's important to get started with it. But it will take some time for that to become effective. And it's envisaged that, in 2025, property tax would be a key source of additional revenue in that year.
On the question with respect to even-handed treatment of Sri Lanka versus other countries, let me assure you that the IMF is very sensitive to that question, whether countries are being treated in an even-handed manner, given the particular circumstances that they are in. And, of course, in Sri Lanka, we follow that principle as well. Indeed, we have a department, a Strategy, Policy and Review Department, that has one of its key missions to ensure even-handed treatment of countries. And we follow that principle in Sri Lanka very closely. Thank you.
MS. VU: Thank you, Peter. I think this brings us to the conclusion of our press briefing today. The recording and transcript of this briefing will be posted on imf.org. Please do check it out after this meeting. Thank you very much for joining us, and have a good day. Bye-bye.
MR. BREUER: Thank you.
