Transcript of Press Briefing: Sri Lanka, November 2024

IMF News, November 27, 2024

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Staff-level agreement reached with the Sri Lankan authorities on the Third Review under the 4-year Extended Fund Facility (EFF) supported program; agreement is 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, including the submission of a 2025 budget consistent with program objectives.
- Confirming that the program remains adequately financed.
Upon completion of the Executive Board review, Sri Lanka would have access to about $330 million.
IMF financial support dispersed under the arrangement would total about $1.3 billion after the disbursement linked to the Third Review.
Prior actions focus mostly on the budget; the authorities have committed to stay within program guardrails (primary surplus, revenue, and quality of fiscal measures).

Economic growth: the economy expanded on average by 4 percent year-on-year in the four quarters ending in June of this year.
Inflation (third quarter): average headline inflation 0.8 percent and core inflation 3.8 percent.
Gross official reserves: increased to $6.4 billion at the end of October with sizable foreign exchange purchases by the central bank.
Tax revenue context: tax revenue in 2022 was "in the order of 7 percent of GDP" (noted as a key underlying cause of the crisis).

Program performance:
- All quantitative performance criteria and indicative targets for end June 2024 were met except for the target on social spending.
- Targets for September 2024 were met except for the one on social spending.
- Most structural benchmarks due before October were either met or implemented with delay; some delays attributed to the election cycle.
Public Financial Management and governance:
- Adoption of the new Public Financial Management Act to instill principles of good governance and transparency into public finances.
- The new government’s commitment to program objectives noted as enhancing confidence and ensuring policy continuity.
State-owned enterprises (SOEs) and energy pricing:
- Cost recovery energy pricing (electricity and fuel) is a key pillar to reduce fiscal risks from SOEs.
- Legacy debts of SOEs are being repaid and resolved to further reduce fiscal risks.
- Commitment to publish financial statements of SOEs to improve transparency.
Revenue mobilization and tax administration:
- Continued revenue mobilization efforts and spending restraint are needed to prepare the 2025 budget in line with program parameters.
- Revenue administration reforms and efforts to improve tax compliance are underway.
- Avoiding new tax exemptions emphasized to reduce fiscal revenue leakages and corruption risks.

Social spending:
- The program’s minimum spending target on social spending was missed for end June 2024 and for September 2024.
- The IMF emphasized the government’s responsibility to protect the poor and vulnerable and to redouble efforts to meet the program’s minimum social spending target.
Aswesuma cash transfer program:
- Importance of improving targeting, adequacy, and coverage of social safety nets, particularly Aswesuma, was underscored.
- Operational impediments identified (e.g., recipients needing ID cards and bank accounts) that delayed delivery of cash transfers.
- The IMF welcomed the recent decision to increase the beneficiary amount of cash transfers for the poor and extremely poor categories and will monitor closely.
Equity considerations:
- IMF staff noted that tax reforms aim to be progressive; the top 20 percent of income earners account for the bulk of tax contributions.

Commercial debt: Agreement in Principle with bondholders described as an important milestone that puts Sri Lanka’s debt on a path towards sustainability.
Next steps:
- Complete the commercial debt restructuring.
- Finalize bilateral agreements with official creditors along the lines of the accord with the Official Creditor Committee.
- Implement the terms of other agreements to restore debt sustainability.
IMF financing-assurances review assesses progress in restructuring and the adequacy of financing; staff judged there has been good progress to date.

Monetary policy remains under the Central Bank; the government reaffirmed commitment to central bank independence.
The Central Bank Act passed last year was noted as a "hard-won gain" underpinning independence.
Rebuilding external buffers through strong reserve accumulation remains important given ongoing global uncertainty.
Policy interactions:
- Possible lifting of vehicle import restrictions discussed; lifting restrictions would be an important source of revenue but needs careful management with respect to reserves and monetary implications.

Mission timing: IMF mission team in Colombo since November 17; briefing dated November 27, 2024.
Election-related delays:
- Some structural benchmarks delayed because of the election cycle.
- The timing of the budget process and the disbursement schedule has been affected by elections; IMF will seek ways to bring the program back to its regular schedule if policy remains on track.
Flexibility and program adjustments:
- IMF reviews provide opportunities to take stock and discuss adjustments within program guardrails; authorities’ preferences can be accommodated insofar as they remain consistent with those guardrails.
Political mandate:
- IMF staff noted the new government’s sweeping mandate can provide political stability supportive of reform momentum, but emphasized that the underlying economic challenges remain and require continued revenue mobilization and prudent expenditure management.

Transcript of Press Briefing: Sri Lanka, November 27, 2024 — IMF Communications Department