Press Briefing of the First Review of Sri Lanka’s Extended Fund Facility Arrangement

IMF News, October 22, 2023

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Press Briefing of the First Review of Sri Lanka’s Extended Fund Facility Arrangement

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Bibliographic details

• Published: October 22, 2023

Program status and financial access

• IMF staff reached a staff-level agreement with the Sri Lankan authorities on the first review under the Extended Fund Facility Arrangement; the agreement is subject to approval by IMF management and its Executive Board.
• Access upon Board approval: about $330 million, bringing total IMF financial support disbursed to about $660 million out of roughly 3 billion that would be available over the four-year life of the program.
• Agreement conditional on:
  • Implementation by the authorities of all prior actions.
  • Completion of the Financing Assurances Reviews confirming sovereign debt is being restructured in a timely manner and in line with the program's debt targets.

Macro performance and outlook

• Program performance at end June was satisfactory.
  • All quantitative performance criteria were met except on expenditure arrears.
  • All indicative targets were met except on tax revenues.
  • Most structural benchmarks were either met or met with delay.
• Economic indicators and risks:
  • Rapid disinflation noted, but growth momentum remains subdued and recovery is not yet assured.
  • External position weakened due to slow progress on debt restructuring; reserve accumulation slowed in recent months.
  • Agreeing on debt treatments consistent with restoring debt sustainability quickly is key to resolving uncertainty that is constraining businesses and external financing.
  • Delays in creditor agreements risk worsening the economic outlook, widening financial gaps, hindering return to sustainable growth, and reducing capacity to pay.

Fiscal policy, revenue mobilization, and tax measures

• Authorities committed to increase revenues, improve governance and tax administration, and actively eliminate evasion.
• Revenue performance:
  • Staff noted that revenue mobilization is expected to fall short of projections by the end of the year by 15 percent.
  • Objective: achieve revenue that exceeds 12% of GDP (noted as program objective in discussion).
• Policy tools discussed:
  • Revenue-based fiscal consolidation to narrow the gap between expenditures and revenues.
  • Property tax and wealth/property tax measures are in the program design; property tax expected to become a key source of additional revenue in 2025 (implementation requires time and preparatory work).
  • Authorities are working on compensating measures and tax-administration reforms to improve compliance, broaden the tax base, and ensure equity.

Governance, anti-corruption, and structural reforms

• Governance Diagnostic Report:
  • Authorities published the Governance Diagnostic Report on time; Sri Lanka is the first country in Asia to do so.
  • The report contains many recommendations; authorities committed to implement key recommendations and to develop an action plan to address corruption risks and strengthen accountability.
• Structural reforms highlighted:
  • Cost recovery in energy pricing to mitigate fiscal risks from state-owned enterprises.
  • Strengthening social safety nets to protect the poor and vulnerable.
  • Structural reforms to make the electricity sector more efficient and improve SOE governance to lower costs over the medium and long term.

Social protection, targeting, and distributional concerns

• Social safety net is a core pillar of the program:
  • Program commits to raise the social spending floor and improve targeting of beneficiaries.
  • Authorities developed a social registry intended to be dynamic; grievance procedures exist for those who believe they were excluded or misclassified.
  • IMF engagement includes recommendations to strengthen targeting, adequacy, and coverage.
• Policy design intent:
  • Tariff adjustments (e.g., electricity) are considered necessary to eliminate sector losses that become fiscal burdens on taxpayers, including the poor.
  • Mitigation of adverse impacts on the poor to be achieved through strengthened social safety net measures.

Debt restructuring, creditors, and the Financing Assurances Review

• Debt treatment process:
  • Critical next step after the domestic debt operation: secure agreement with official creditors on a debt treatment consistent with program parameters and debt targets.
  • IMF took note of a tentative agreement between Sri Lanka and the Export Import Bank of China; IMF will analyze details when received.
  • Negotiations between commercial creditors and Sri Lanka are ongoing.
• IMF role and standards:
  • IMF will monitor whether agreed treatments are compliant with program debt targets (debt stock, debt service, and required debt relief within the program period).
  • Sri Lanka committed to principles of parity and transparency; these principles are important for creditor participation and are of interest to the IMF.
• Financing Assurances Review (FAR):
  • FAR will assess whether adequate progress has been made with debt restructuring to give confidence that restructuring will be concluded in a timely manner and in line with program debt targets.
  • Adequate progress for FAR: demonstration of a clear path to restoring debt sustainability.

Process, timing, and comparisons

• Timeline references:
  • Staff-level agreement for the program was reached on September 1st, 2022 (contextual reference).
  • The IMF Executive Board considered the program on March 20th, 2023 (contextual reference).
• Comparisons and sequencing:
  • IMF staff noted that securing financing assurances in recent sovereign restructurings (e.g., Chad, Zambia, Sri Lanka, Ghana) has generally become faster over time, influenced by Global Sovereign Debt Roundtable discussions.
• Next steps before Board consideration:
  • Authorities must implement agreed prior actions.
  • Completion of Financing Assurances Reviews demonstrating adequate progress on debt restructuring.

Communications and transparency

• Staff report and details:
  • The specifics of the prior actions and other program details will be published when the staff report is released after IMF Executive Board consideration.
• Press logistics:
  • Recording and transcript of the briefing will be posted on imf.org.

Participants: HUONG LAN “PINKY” VU (Moderator), PETER BREUER (Senior Mission Chief for Sri Lanka), KATSIARYNA SVIRYDZENKA (Deputy Mission Chief for Sri Lanka), SARWAT JAHAN (Resident Representative in Sri Lanka).

Press Briefing date: October 21, 2023.

References

• Sri Lanka and the IMF
• Transcripts
• PRESS CENTER
• https://www.imf.org/en/home