Press Briefing on the Second Review of IMF-supported Program and Article IV Consultation Mission for Sri Lanka
IMF News, March 21, 2024
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- Published: March 21, 2024
Review outcome and program status
- Staff-level agreement reached on economic policies to conclude the second review of the 4-year EFF supported program; subject to approval by IMF management and the IMF Executive Board.
- Completion of the Executive Board review requires:
- implementation by the authorities of prior actions, and
- completion of financing assurances confirming multilateral partners financing contributions, and assessing adequate progress with the debt restructuring.
- Upon Executive Board completion, Sri Lanka would have access to about $330 million, bringing the total IMF financial support under the program under the arrangement to approximately $1 billion after three disbursements.
- Program performance: all quantitative performance criteria and indicative targets for end-December 2023 met, except for the indicative target on social spending. Most structural benchmarks due before end-February were either met or implemented with delay.
Recent macroeconomic developments and key statistics
- Growth:
- Turned positive after six consecutive quarters of contraction.
- Registered 1.6 percent and 4.5 percent year-on-year in the third and fourth quarter of 2023, respectively.
- Inflation:
- Peak of 70 percent in September 2022.
- Declined to 5.9 percent in February of 2024.
- Reserves:
- Gross official reserves increased to $4.5 billion at end February, with sizable foreign exchange purchases by the central bank.
- Output and revenues:
- GDP in dollar terms went down 15 percent in 2023, relative to ‘22.
- Sri Lanka's general revenue in 2022 was in the order of 8 percent.
- Between 2019 and 2022, Sri Lanka's general revenue averaged something like 9 percent, maybe 9.5 percent of GDP.
- By international comparison, other emerging market countries are in the order of 26 percent.
Financing, IMF lending size, and disbursement mechanics
- IMF lending determination factors: size of the external shock, resulting BOP need, adjustment in domestic policies, and financing envelope from other development partners.
- For Sri Lanka:
- It was determined Sri Lanka would avail of $3 billion from the IMF Lending Facilities, which would be disbursed over 4-years in equal disbursements about twice a year.
- Routine procedure: the IMF conducts financing assurances to confirm multilateral institutions’ indicated financing will be available for the next 12 months and to gain comfort for the period of the program beyond that.
- Next disbursement: a $337 million tranche was referenced in questioning as the upcoming tranche that would follow completion steps.
Debt restructuring and creditor engagement
- Agreements in Principle with the Official Creditor Committee and Export-Import Bank of China on debt treatments consistent with program parameters were important milestones.
- Critical next steps:
- Finalize the agreements with the Official Creditors and convert Agreements in Principle into actual agreements or memoranda of understanding.
- Reach Agreements in Principle with the main external private creditors in line with program parameters in a timely manner.
- Rationale: completing debt restructuring is essential to restore Sri Lanka's debt sustainability over the medium term and to allow multilateral, bilateral, and private financing — including project finance — to resume more fully.
Policy priorities and structural recommendations
- Fiscal policy and revenue:
- Continued progress towards the introduction of the property tax is critical, together with revenue measures to meet the revenue mobilization goals in 2025 and beyond.
- Strengthen revenue administration and anticorruption efforts to boost tax collections.
- Energy and SOE fiscal risks:
- Maintain cost recovery in fuel and electricity pricing to minimize fiscal risks arising from state-owned enterprises.
- Monetary policy and inflation:
- Continued monitoring warranted to help anchor inflationary pressures and support macroeconomic stability.
- Rebuilding external buffers through strong reserves accumulation remains important given ongoing external uncertainty.
- Governance and anticorruption:
- Authorities published an action plan to implement key recommendations of the Governance Diagnostic Report; sustained efforts to implement these reforms are essential to address corruption risks, rebuild economic confidence, and make growth more robust and inclusive.
- Social protection:
- Continued efforts to improve targeting, adequacy, and coverage of social safety nets, particularly Aswesuma, remain critical to protect the poor and vulnerable.
- Program includes a spending floor on social safety nets to ensure a minimum level of government spending to protect the poor and vulnerable.
Central Bank actions, reserves rebuilding, and exchange rate considerations
- Rebuilding reserves can proceed via:
- organic purchases by the central bank in the foreign exchange market, and
- engaging in swaps (with domestic banks or other central banks); swap arrangements with other central banks are an important part of global and regional financial safety nets.
- On swaps with domestic market participants: swaps are one method among others to rebuild reserves; the mission noted both types of swaps can be used.
- Central Bank independence:
- Preserving Central Bank independence is an absolutely key pillar under the program.
- Transparency around decisions (including remuneration benchmarking) is important to preserve credibility.
- Exchange rate assessment:
- The IMF conducts an external sector balance assessment that considers real exchange rate equilibrium; the last such exercise (two years ago) showed Sri Lanka’s exchange rate in real terms was overvalued and still needed to depreciate to reach equilibrium.
- Persistent import restrictions complicate observation of the true equilibrium exchange rate until these are phased out over time.
Political cycle, program implementation, and timeline
- The mission heard many proposals during meetings with authorities and political stakeholders; the IMF is willing to consider alternative ways to meet program objectives so long as proposals are realistic and achievable within the program timeframe.
- Program risks: the path to recovery is “knife edged”; the IMF emphasized the need to avoid undoing hard-won gains.
- Timeline for review completion and Executive Board consideration:
- Completion depends on implementation of prior actions and completion of financing assurances.
- Semiannual reviews normally occur in spring and fall; staff work and Executive Board processing take additional time. The mission adjusts timing according to developments.
Press Briefing on the Second Review of IMF-supported Program and Article IV Consultation Mission for Sri Lanka, March 21, 2024 — IMF Communications Department