Sri Lanka and the IMF

Press Release: IMF Approves US$567 Million in PRGF/EFF Credit Arrangements for Sri Lanka
April 18, 2003

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Sri Lanka—Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding
Colombo, Sri Lanka, March 28, 2003

The following item is a Letter of Intent of the government of Sri Lanka, which describes the policies that Sri Lanka intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Sri Lanka, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

1. The government of Sri Lanka has adopted an economic program for 2003-2006, which aims to reduce poverty through private-sector led growth. This strategy focuses on creating the conditions for a vibrant private sector and a sound fiscal position, and for helping to establish lasting peace by relief, rehabilitation, and reconstruction (RRR) efforts. Our economic program is set out in the attached Memorandum on Economic and Financial Policies (MEFP), and the Poverty Reduction Strategy Paper (PRSP). In support of this program, we are requesting a three-year PRGF arrangement in the amount of SDR 269 million (65 percent of quota) and concurrently a three-year EFF arrangement in the amount of SDR 144.4 million (35 percent of quota).

2. The government believes that the policies set out in the attached MEFP and the Technical Memorandum of Understanding (TMU) are adequate to achieve the objectives of the program. However, it stands ready to take additional measures appropriate for this purpose, and will consult with the Fund in accordance with the policies of the Fund on such consultations. The government will conduct the first review of the PRGF-EFF arrangements with the Fund no later than September 30, 2003.

3. The government will provide the Fund with all the information in a timely manner as might be requested to monitor progress in implementing policies and achieving the objectives of the PRGF-EFF supported program.

4. Given our balance of payments need, at this stage, we also request an extension of repurchase expectations arising in the period July 2003-June 2004 to the obligations schedule.

Sincerely yours,

Hon. K.N. Choksy
Minister of Finance
Governor A. S. Jayawardena
Central Bank of Sri Lanka

Sri Lanka—Memorandum on Economic and Financial Policies for 2003 Under The Three Year Program of the PRGF-EFF Arrangements

I. Introduction and Background

1. Sri Lanka today stands at a pivotal point in its history. After two decades of conflict, the recent progress in the peace process has raised hopes throughout the country that lasting peace may be finally within reach. However, securing lasting peace is inextricably linked with improving economic conditions, and we need to succeed on both fronts if the aspirations of the people of Sri Lanka are to be fulfilled. To this end, we have launched a comprehensive economic reform and poverty reduction strategy (PRS)—Regaining Sri Lanka—with the aim to alleviate poverty by widening opportunities for the poor to benefit fully from accelerated private-sector led growth, eschewing the previous unsustainable policies of "redistribution and transfers."

2. In late 2001, when the present government took office, the country was in the midst of a serious economic crisis. A series of shocks—a global slowdown, an attack on Colombo airport, a severe drought, and policy deficiencies had resulted in severe macroeconomic imbalances (including a runaway fiscal deficit and ballooning public debt) and intense pressures on the exchange rate. To stabilize the economy, the previous government entered into a Stand-by Arrangement (SBA). Although, the SBA met some of its key objectives (stemming reserves losses), the program went seriously off-course, particularly with the marked deterioration in the fiscal accounts. Thus, immediately upon taking office, our priority was to bring the SBA-supported program back on track. This was achieved through several policy and structural reforms—including cutting defense spending, broadening the tax base, and improving tax administration. The final review of the SBA was completed in September 2002.

3. This memorandum describes the medium-term economic program during 2003-2006, in particular the economic and financial policies for 2003. The economic program builds on the reforms initiated under the SBA, and is guided by the objectives and overall strategy laid out in the PRS paper.

II. Medium-Term Framework and Policies

4. Regaining Sri Lanka—our poverty reduction strategy program (PRSP)—identifies several factors that underlie Sri Lanka's high poverty. Chief among these are inadequate growth—reflecting the continued dominance of the public sector in the economy and barriers to productivity growth; unequal opportunities available to the poor—due to geographical isolation and lack of economic integration, limited access to high quality education and basic services, and social exclusion and powerlessness; and the effects of the two-decade long armed conflict. In addition, low labor productivity in agriculture—due to a lack of clear land-tenure rights and continued environmental degradation; barriers to urbanization—particularly due to an over-regulated labor market, which has stifled growth of employment in the formal sector; and problems with governance—especially in the politicization of poverty reduction programs and incomplete decentralization, have also played their part in keeping poverty high.

5. To adequately address these issues, the PRSP contains a broad reform agenda. Within this large agenda, we have reached understandings on the broad areas that will be supported by the Fund, the World Bank, the AsDB, and our bilateral donor partners. Under the PRGF-EFF-supported program, the main focus will be on structural reforms that remove barriers to productivity growth and encourage private-sector led development, restructure the public finances such that scarce resources are freed to redress the lack of opportunities and access of the poor, and provide a stable and enabling macroeconomic environment.

6. While aiming for sustained growth of 8-10 percent in the long run, our medium-term macroeconomic framework envisages growth to average 6½ percent in 2003-06. The higher growth rate will depend on both increased private and public sector investment, as well as enhanced productivity growth. In the absence of major external shocks, a prudent monetary policy should help inflation fall to 5 percent by 2006. Despite an increase in export growth as external conditions improve over the medium term, reconstruction-related imports are likely to raise the current account deficit to an average of 4 percent of GDP. Gross official reserves are targeted to rise modestly to 3½ months of import cover by 2006. Given the projected current account deficit, net capital inflows, and reserve accumulation, we envisage substantial financing gaps during 2003-06 (averaging $400 million per year) that are expected to be filled by donor support.

7. To achieve these objectives, our policies will focus on four areas:

  • Restoring fiscal sustainability. Government debt has expanded dramatically in recent years to over 100 percent of GDP, while interest payments have reached 7½ percent of GDP. To bring the level of debt to a manageable level in the medium term, the program aims to reduce the fiscal deficit by 1¼ percent, on average, per year through 2006. To achieve this, revenue will need to be raised by 2½ percent of GDP by 2006, by broadening the tax base mainly by simplifying the tax regime, rationalizing tax exemptions and tax incentives, and improving tax administration. In addition, expenditures will need to be rationalized and reoriented toward priority social and infrastructure spending.

  • Implementing structural reforms that remove barriers to productivity growth and encourage private-sector led development. In particular, increasing the efficiency of the banking and financial sectors (including by restructuring the state banks and the insurance sector); encouraging competition and private investment by ending state monopoly in various sectors, restructuring public enterprises (including through privatization), increasing labor market flexibility through labor law reforms, and by establishing a light-handed regulatory regime; and further liberalizing the trade regime (including by moving towards a stable, low, uniform tariff rate).

  • Creating opportunities for the poor to share more fully the benefits of higher growth. Given the strong rural and regional bias in the incidence of poverty in Sri Lanka, revitalizing rural development by reforming agricultural policies and encouraging the growth of medium and small-scale enterprises is vital. In addition, improving access of the poor to markets through better transport and telecommunication infrastructures and access to better education and health services will also play a key role.

  • Garnering resources for reconstruction. The challenges arising in securing lasting peace are two-fold-immediately, the relief, rehabilitation, and reconciliation (RRR) process will need to be advanced, while in the medium-term, the destroyed infrastructure and institutions in the North and the East have to be reconstructed and the regions reintegrated to the rest of the country. Significant resources will be needed to meet these challenges. The government will seek donor assistance and reorient public expenditures for these purposes, while ensuring that priority needs of the rest of the country continue to be met.

III. The Current Economic Setting

8. The economy is beginning to recover from the downturn in 2001. In 2002, GDP grew by an estimated 3-3½ percent, after declining by 1½ percent the previous year. The rebound in activity was led by recovery in domestic demand and exports of services as progress toward peace revived business and consumer confidence and tourism. Inflation trended down (falling to 9½ percent in 2002 from 14¼ percent in 2001), partly due to increased agricultural supplies from the North and the East. Despite soft commodity exports, reflecting weak external demand, the current account deficit remained broadly unchanged from 2001, as inflows of remittances and tourism receipts strengthened. Gross reserves rose to $1.6 billion (2½ months of import cover), while the rupee remained stable in real effective terms.

9. Fiscal consolidation enabled a steady decline in interest rates. Despite revenue shortfalls—associated with the teething problems in the changes to the tax system (replacement of the goods and services tax (GST) and the national security levy (NSL) with the value-added tax (VAT)), weak tax administration, and continued losses in the Ceylon Electricity Board (CEB), restraint on expenditures enabled the 2002 fiscal deficit to be limited to 8.9 percent of GDP—2 percent of GDP below the deficit in 2001, although more than the budget target of 8½ percent of GDP. The fiscal adjustment and the decline in inflation allowed policy interest rates to be cut by 300 basis points since January 2002, which has aided private sector credit to begin to recover.

10. Significant progress has been made on the reform front:

  • Fiscal, welfare, pension. A Fiscal Management Responsibility Act (FRA) was enacted in January that sets a medium-term fiscal deficit path, and mandates "pre-election budget reports" to discourage pre-election handouts. A new Board of Investment (BOI) law was passed by Parliament, which eliminated BOI's power to grant tax holidays and incentives outside the regular tax legislation/tax code. A Welfare Benefit Law was enacted in September, which sets clear and transparent eligibility criteria, provides guidelines for the termination of the benefits, and penalties to reduce politicization and mistargeting. A contributory pension scheme for all new public servants was presented to Parliament in January.

  • Public enterprises and privatization. The electricity reform bill was enacted in December 2002 to pave the way for restructuring the state electricity monopoly (CEB). The restructuring of the Ceylon Petroleum Corporation (CPC) is progressing in step with the liberalization of the petroleum sector. Twelve percent shares of Sri Lanka Telecom (SLT) were sold through an IPO in December 2002, and the privatization of the bus companies is expected to be finalized in March 2003.

  • Banking. Amendments to the Monetary Law Act were enacted to provide the Central Bank (CBSL) more control over its monetary instruments. To strengthen the integrity of the banking system, the minimum CAR was raised to 10 percent for all domestic banking units from January 1, 2003, and on a consolidated basis on all domestic and foreign banking units effective December 31, 2003.

  • Labor. Labor reform bills on a new redundancy compensatory formula, time-bound resolution of labor disputes, eliminating restrictions on reasonable overtime work by women, and increasing penalties for child labor were enacted in January 2003.

  • Regulatory. A multi-sector regulatory bill was enacted in September to establish a single regulatory authority for all public utilities. To enhance competition in the telecom sector, access to international gateways was liberalized this January. Amendments to the Securities Commission Act, which increase the regulatory scope of the agency to a broader range of financial institutions, were passed by Parliament in January 2003.

IV. Macroeconomic Objectives and Policies for 2003

A. Macroeconomic Objectives

11. We expect growth to reach 5½ percent in 2003, underpinned by strengthened consumer confidence and a resumption of delayed private investment projects with the progress toward peace, increase in public investment, higher tourism, and a return to normal weather. Inflation is expected to decline to 7 percent by end-year. The current account deficit is likely to rise to 3¾ percent of GDP, as an export rebound is more than offset by higher imports related to increased activity and reconstruction needs. Gross official reserves are targeted to increase to $1.9 billion (over 2½ months of imports).

B. Post-Conflict Challenges

12. Peace talks with the LTTE have progressed rapidly and the support of the international community has been heartening. However, securing lasting peace also poses challenges for economic policy. Specifically,

  • Resettling our displaced populations; rebuilding the administrative and institutional capacity in the North and East; and reconstructing the dilapidated infrastructure will impose an immediate fiscal cost. There will also be an increased demand on the government's normal programs, including the provision of an adequate social safety net.

  • While we have received commitments of US$70 million from donors last November for immediate relief, substantially more funds are needed. To ensure that such funds are properly spent, we have appointed the World Bank to manage the newly created North and East Reconstruction Fund (NERF). With the help of all stakeholders, we are preparing a comprehensive needs-assessment both for reconstruction-related spending as well as in support of the overall reform agenda, ahead of the donor conference slated to be held in Tokyo in June.

C. Fiscal Policy

13. Continued fiscal consolidation remains key to our macroeconomic program. The 2003 budget targets a deficit of 7½ percent of GDP in line with the PRSP, of which ½ percent of GDP is related to post-conflict spending in the North and the East. If concessional foreign assistance becomes available for additional post-conflict spending (which we estimate to be ½ percent of GDP), we plan to incorporate the extra spending through a supplementary budget later in the year.

14. The budget includes several revenue augmenting measures, amounting to ¾ percent of GDP. Among these, we have already extended the VAT to the financial sector at a rate of 10 percent; extended the debits tax from current accounts to include savings accounts; imposed 2-10 percent duty on currently exempt imports; and lifted VAT exemptions on some items. However, we will not be able to extend VAT to the wholesale and retail sectors this year, due to complications arising from the revenue sharing arrangements with provincial councils, particularly in light of the ongoing peace negotiations. We are committed to extending the VAT to these sectors by January 2004, and will work to resolve the outstanding issues by that time. In addition, we are taking measures to ensure that the bottlenecks and procedures with respect to tax administration are cleared for a smooth implementation. To offset the associated revenue loss in 2003, we will impose a levy on the Telecommunication Regulatory Commission (TRC), which will also raise future government revenue. The top income tax rate has been cut from 35 to 30 percent to encourage better tax compliance and investment.

15. In light of the pressures on public finances, expenditure rationalizing measures of around ½ percent of GDP are also included in the budget. These include a continued wage restraint and general hiring freeze of civil servants in 2003 (apart from filling some specific needs for technical, management, education and health personnel), closing of redundant cadre positions; a reduction in defense spending; refinancing (e.g., overdrafts) with long-term bonds; and better targeting Samurdhi program in line with the new Welfare Benefit law. The expenditure measures will not compromise public spending on social priorities. Also, to better track expenditures we will establish a medium-term expenditure framework by July 2003.

16. The government will carefully manage the financing of the budget and limit the use of nonconcessional funds. We will use the delayed privatization receipts for SLIC and the bus companies (slated to be completed last year but now expected in March 2003) to reduce net domestic financing from other sources, while keeping to the privatization plans already envisaged for 2003. Thus, with net external financing expected at 2 percent of GDP, net domestic borrowing will be contained to about 4 percent of GDP (compared with 8 percent of GDP in 2002). This will allow reducing outstanding credit from banking system by 1 percent of GDP. The government will also limit its contracting of new medium- and long-term foreign currency nonconcessional loans to $510 million. Most of this borrowing is related to loans from bilateral donors for projects with grant elements ranging from 20-30 percent. These projects are incorporated into the PRSP and are critical to reducing poverty and reconstructing the economy. We are fully committed to substantially reducing reliance on nonconcessional borrowing in future years, by avoiding excessive external commercial borrowing and working closely with donors to increase the concessionality of bilateral loans.

17. Looking ahead, we plan to continue rationalizing tax exemptions and incentives in the 2004 budget. The existing exemption and incentive regime is outdated and has hindered the much needed broadening of the tax base. In order to better understand the areas and dimensions along which the tax exemptions and incentives need to be rationalized, we will undertake a comprehensive study of the cost and benefits of the current tax regime, including conducting an international comparison of where Sri Lanka stands in this area. While the specific form of rationalizing and targeting of tax incentives and regime will depend on the conclusion of the study, we will consider various options in the 2004 budget, including reducing the number and length of tax holidays, the level and duration of concessional tax rates, stricter limits on roll over of tax holidays; and limiting incentives to strategic sectors.

18. As envisaged in the PRSP, we intend to establish a revenue authority to strengthen tax collection, and provide better service. We have appointed a project manager (the interim chief executive officer) and project team, who are entrusted with setting up of the authority. A workshop is being organized in April in Singapore to provide input to what would be the basis of the Parliamentary Acts governing the operations of the Revenue Authority. By June 2003, we will present to Parliament legislation for establishing the revenue authority and a detailed implementation plan.

19. With regards to quasi-fiscal policy, the key public enterprises (CPC, CWE, and CEB) will limit their bank borrowing. In particular, public corporations are expected to reduce their overall outstanding stock of bank debt by Rs 10 billion in 2003. In the case of CPC, petroleum prices will continue to be set by the existing automatic pricing formula, but to compensate for the removal of the debt recovery component in the formula, the corporation's assets will continue to be sold to pay down its bank debt. However, given the recent increase in international oil prices, since mid-February, the government has subsidized diesel and kerosene prices (at an estimated cost of Rs 300 million per month), compensating CPC directly. These temporary measures were taken to ameliorate the impact of the price increase on the poor, to be fully offset by spending cuts in the Budget. From April onwards, if oil prices continue to remain high, we will protect the budget and pass the full effect of high oil prices on domestic fuel prices. CWE will use proceeds from its asset sales to also draw down its bank debt, while CEB (and its unbundled units) do not intend to increase bank debt during 2003.

D. Exchange Rate and Monetary Policies

20. Our monetary program will be based on a floating exchange rate regime, which has, thus far, served the economy well. In this regard, exchange rate interventions will continue to be limited to smoothing extreme short-term volatility or meeting net international reserves (NIR) target in line with the monetary program. The floating of the exchange rate has provided the CBSL an added instrument to absorb shocks. We are committed to make full use of exchange rate flexibility in responding to both short- and long-term exogenous shocks.

21. Monetary policy will continue to balance the need to support the economic recovery and keep inflation in check. Reserve money will remain the nominal anchor. In line with the anticipated increase in economic activity, broad money growth will be targeted at 13½ percent in 2003. The current levels of interest rates appear broadly appropriate, but we might consider modest easing of rates if the pace of disinflation and fiscal consolidation picks up in the coming months. The CBSL also stands ready to use the existing stock of treasury bills or issue its own paper to sterilize any excess foreign inflows to adhere to the program targets. The CBSL launched formally its active open market operations in March 2003. To help smooth teething problems at the initial phase of active OMOs, a short-term IMF advisor has been stationed at the CBSL.

E. Structural Issues

22. The structural reform agenda for the 2003 program under the PRGF-EFF arrangements will focus on:

Financial Sector Reform

  • To enable commercial banks to adequately deal with their nonperforming assets, a draft asset management company (AMC) law is being prepared and will be presented to parliament by June 2003.

  • Given the magnitude of Peoples Bank's nonperforming loans (estimated at Rs 23 billion at end-2002-a quarter of the loan portfolio) and poor cost structure, restructuring the bank is an urgent priority. To this end, the government has constituted a restructuring committee and appointed an investment consultant, and will complete an external evaluation of assets and liabilities by September 2003. Since any large recapitalization would impose a substantial burden to the population at large, the government would seek to commercialize the bank. To commercialize the bank as a single entity, an open and transparent process would be initiated by September 2003. In case this option was not feasible, Peoples Bank would be separated into viable sub-units and commercialized, through an open and transparent process. In any case, it is intended that restructuring of the bank would be completed by March 2004, and would be in full accordance with the amended Banking Act.

  • The government will present the revised banking law and exchange management acts to parliament by June 2003. These revisions are designed to enhance CBSL's supervision capacity, facilitate easier entry and exit into the banking sector, and modernize the exchange market. The CBSL will also move expeditiously to resolve the problems of Pramuka Bank, whose license has been revoked.

  • To increase market penetration and efficiency in the insurance sector, the state insurance corporation (SLIC) is being privatized.

Public Enterprise Reform

  • On the restructuring of loss-making enterprises, we have already initiated the unbundling of CEB, consistent with the timetable agreed with AsDB. The power sector is intended to be unbundled into areas of generation, transmission and distribution by October 2003.

  • We have decided on the list of enterprises to be privatized in 2003 (in addition to the sale of SLIC and the bus companies). Key items include the sale of CPC assets and market network, sale of 8½ percent of government shares in Sri Lanka Telecom (SLT), the Hilton Colombo hotel, and CWE's retail business.

Trade and Labor Market Reforms

  • Trade reform will focus on phasing out the 20 percent import surcharge and simplifying the tariff structure. In particular, the import surcharge will be cut to 10 percent by January 2004, and then fully eliminated by January 2005. This timetable will be announced in the 2004 budget. In addition, the 2004 budget will include interim targets for rationalizing the existing tariff structure to a simplified three-band regime to be in place in 2005.

  • To increase labor market flexibility we will implement the recently enacted time-bound labor dispute settlement law, the redundancy compensatory formula and other laws relating to working conditions by April 2003. To provide a cushion against loss of income, an unemployment protection and retraining scheme is being designed with technical assistance from the ILO. Given the pressures on public finances, the budgetary resources to finance any such scheme will be minimized. The compensatory formula will be designed in line with international practices.

Regulatory Reforms

  • In line with the recently enacted multisector regulatory bill, we have established three multisector regulatory bodies covering utilities, transport and communication, and envisage setting up a fourth for all financial services. To this end, we will complete the appointment of the Public Utility Commission by April 2003.

F. Poverty and Social Impact Analysis and Monitoring

23. We will initiate a poverty and social impact analysis (PSIA) of our key policy reforms in 2003, in collaboration with the World Bank. We recognize that some of the proposed policies that are committed to in this MEFP, such as public sector restructuring, may have short-term costs for the poor. The government is committed to taking countervailing measures, such as voluntary retirement schemes and a possible unemployment protection plan, to ameliorate the impact of policies on the poor. Moreover, working closely with donors, we will update our poverty reduction strategy, after analyzing the household income and expenditure survey, completed by the Department of the Census and Statistics in February 2003.

24. As indicated in our PRSP, we will put in place a monitoring and control framework to track and protect poverty-reduction expenditures. To start with, we have implemented an in-built monitoring system in the Samurdhi program to track improvements in indicators of poverty that will help identify movement of beneficiaries in and out of the program.

G. External Financing

25. The policies described above and our commitments under the PRGF-EFF supported program would help to galvanize donor financing. The estimated financing gap of about $426 million in 2003 is expected to be filled by mostly concessional financing from official creditors. The World Bank has committed $110 million of balance of payments support under the PRSC facility, while the AsDB plans to provide about $60 million through their sectoral loans. Bilateral donors are expected to provide $95 million, including $70 million that has already been committed during the Oslo donors meeting in November 2002. The remainder of the gap ($161 million) is expected to be financed by the PRGF/EFF arrangements.

H. Safeguards and Statistical Issues

26. We remain committed to the financial soundness of the CBSL, adhering to the principles of good governance and best practice as encapsulated in the IMF's safeguards guidelines. In this regard, we will provide the IMF the requested documentation for the PRGF arrangement. Ernst and Young's (New Zealand) will conduct an audit of CBSL's 2002 accounts on a full IAS basis in March 2003.

27. On statistical issues, we plan to migrate our publication of fiscal data in accordance with the GFSM 2001 methodology during 2003 with the help of IMF technical assistance. Sri Lanka is a participant in the GDDS, and we expect full compliance on SDDS by mid-2004.

V. Risks and Contingencies

28. There are risks to the 2003 program and, thus, a need for designing contingency measures.

  • Among the main risks are a slower global recovery and resumption of drought, which could lower growth, thus requiring revisiting our macroeconomic framework. Disruptions in the Middle East could have a significant negative impact on the economy. With fiscal policy tied down by the need to reduce public debt, the exchange rate and monetary policy will have to bear most of the burden of the needed adjustment. Thus, if there were to be downward pressures on the exchange rate, we would allow the rupee to depreciate, intervening only to limit extreme volatility. However, in case the disruptions are protracted, some adjustment may also be needed in the fiscal stance. We will remain in contact with Fund staff to determine the appropriate policy actions.

  • There are also risks to the budget, both on the revenue and expenditure fronts. In line with the requirements of the recently enacted FRA, the government will conduct a mid-term review of the public finances in July 2003. At that time, we will also decide whether additional revenue and expenditure measures are needed to meet the deficit target. We do not intend to grant any general wage increase in 2003, unless during this review, a determination is made that additional resources are available to cover the consequent increase in the wage bill. The government stands ready to take compensatory fiscal measures to keep to the budgeted deficit target, including reducing corporate tax exemptions and further cutting transfers to public corporations.

VI. Program Monitoring and Review

29. To monitor policy implementation under the program, we have reached understandings on the prior action, a set of quantitative performance criteria for end-June and end-December 2003, and a structural performance criterion and benchmarks (Tables 1 and 2). The government intends to bring 90 percent of the shares of SLIC to a point of sale prior to Board consideration of the PRGF-EFF arrangements. There is also a structural performance criterion on the presentation to parliament of the Revenue Authority Act and the preparation of a detailed implementation plan.

30. The government is aware that the first review under the PRGF-EFF arrangements scheduled to be completed by September 30, 2003, would be conditioned on the observance of end-June, 2003 performance criteria. Performance criteria, indicative targets, and precise definitions of quantitative variables monitored under the program are set out in the attached updated Technical Memorandum of Understanding (TMU). The standard clauses on overdue financial obligations to the Fund, accumulation of external payments arrears, exchange restrictions, multiple currency practices, bilateral payments agreements inconsistent with Article VIII, and import restrictions for balance of payments purposes are also applicable as performance criteria.

Table 1. Sri Lanka: Performance Criteria and Indicative Targets,
December 2002–December 2003
(In billions of rupees; unless otherwise indicated)





  Est. Prog. Prog. Prog. Prog.

Performance Criteria1         
Ceiling on net domestic financing of central government deficit          
  Cumulative from January 1, 2002126        
  Cumulative from January 1, 2003  29 44 65 74
Ceiling on net domestic assets of the CBSL29.0 9.2 2.4 0.4 -1.3
Floor on net international reserves of CBSL3
   (In millions of U.S. dollars)
1,277 1,286 1,376 1,429 1,505
Ceiling on contracting or guaranteeing of new nonconcessional
      medium- and long-term external debt by the public sector
  Cumulative from January 1, 2002 (in millions of U.S. dollars)242        
  Cumulative from January 1, 20034(in millions of U.S. dollars)  450 510 510 510
Ceiling on the stock of short-term external debt          
  Cumulative from January 1, 2002 (in millions of U.S. dollars)0        
  Cumulative from January 1, 2003 (in millions of U.S. dollars)  25 25 50 50
Accumulation of external payments arrears0 0 0 0 0
  Continuous performance criterion during the program period         
Indicative Targets         
Floor on central government revenue         
  Cumulative from January 1, 2002261        
  Cumulative from January 1, 2003  73 145 222 304
Primary fiscal balance of central government excluding interest
  Cumulative from January 1, 2002-23        
  Cumulative from January 1, 2003  1 -2 -1 -4
Ceiling on banks' net claims on government2193 189 184 180 176
Credit to public corporations by the banking system543 44 44 44 33
Ceiling on reserve money of the CBSL126 133 135 138 143

1End-June, 2003 and end-December, 2003 will be performance criteria test dates. End-March, 2003 and end-September, 2003 will be indicative targets.
2Adjusted downward by the full amount of excess rupee equivalent of privatization receipts and upward by shortfall of rupee amount of privatization up to quarterly limits as set out in Table 1 of the TMU; adjusted upward/downward by shortfall/excess of rupee equivalent of foreign program assistance as set out in Table 2 of the TMU.
3During 2003, Net International Reserves (NIR) will be valued at market prices adjusted for program exchange rates. Adjusted upward by the full amount of excess privatization receipts and downward by shortfall in privatization receipts up to quarterly limits as set out in Table 1 of the TMU; adjusted upward/downward by excess/shortfall of foreign program assistance as set out in Table 2 of the TMU.
4The ceiling for 2003 includes $100 million loan from Citibank which is expected to be contracted in March 2003.
5Based on the stock of credit to public corporations by the banking system.

Table 2. Sri Lanka: Proposed Policy Actions Under the First Year of
a PRGF-EFF Arrangements

Policy Area Policy Action Proposed

I.  Fiscal Measures      
1.  Tax Policy 1.Extension of the VAT to the wholesale and retail sectors Structural BenchmarkJanuary 31, 20042
  2.Rationalization/Streamlining of tax incentives Structural BenchmarkJanuary 31, 20042
  3.Reduce import surcharge to 10 percent from 20 percent Structural BenchmarkJanuary 31, 20042
2.  Tax Administration 1.Presentation to Parliament of a new revenue authority act and prepare a detailed implementation plan Performance CriterionJune 30, 20031
II.  Non-Fiscal Measures   
3.  Financial Sector Reform 1.Presentation to Parliament of the Asset Management Company (AMC) law Structural BenchmarkJune 30, 20031
  2.Presentation to Parliament of the amended Banking laws and the new Exchange Management Act Structural BenchmarkJune 30, 20031
  3.External evaluation of assets and liabilities of Peoples Bank Structural BenchmarkSeptember 15,
  4. Complete the restructuring of Peoples Bank4 Structural BenchmarkMarch 31, 20043
4.  Public Enterprise Reform 1.Bring to the point of sale 90 percent of the shares in Sri Lanka Insurance Corporation (SLIC)5 Prior ActionApril 10, 2003
  2. Complete the sale of 8.5 percent of the government shares in Sri Lanka Telecom (SLT) and bring to a point of sale the shares held by the government in Hilton Colombo. Structural Benchmark December 31,
5.  Labor Market Reform 1. Implementation of the binding redundancy compensation formula and the revised regulations requiring time bound dispute settlement  Structural Benchmark April 30, 20031 

1Structural measure is tied to the first review of the program.
2Structural measure is tied to the second review of the program.
3Structural measure is tied to the third review of the program.
4Additional specifications of the restructuring of Peoples Bank's March 2004 benchmark would be revisited during the first review (TMU, paragraph 21).
5The term bringing to the point of sale is defined in the Technical Memorandum of Understanding (TMU, paragraph 20).

Table 3. Sri Lanka: Schedule of PRGF/EFF Program Reviews,
Disbursements and Purchases

Availability DateAmount of PRGF Disbursement (In millions
of SDRs)
of EFF Purchases
(In millions
of SDRs)
Total Disbursements
(In millions
of SDRs)

Board Consideration—
April 18, 2003
38.3920.6759.06  14.29To be disbursed upon Board Approval.
August 30, 200338.3920.6759.06  14.29To be disbursed upon completion of the first review of the PRGF/EFF program and meeting of the end-June, 2003 performance criteria.
February 28, 200438.3920.6759.06  14.29To be disbursed upon completion of the second review of the PRGF/EFF program and meeting of the end-December, 2003 performance criteria.
August 30, 200438.3920.6759.06  14.29To be disbursed upon completion of the third review of the PRGF/EFF program and meeting of the end-June, 2004 performance criteria.
February 28, 200538.3920.6759.06  14.29To be disbursed upon completion of the fourth review of the PRGF/EFF program and meeting of the end-December, 2004 performance criteria.
August 30, 200538.3920.6759.06  14.29To be disbursed upon completion of the fifth review of the PRGF/EFF program and meeting of the end-June, 2005 performance criteria.
February 28, 200638.6820.3859.06  14.29To be disbursed upon completion of the sixth review of the PRGF/EFF program and meeting of the end-December, 2005 performance criteria.
Total269.0  144.4  413.4  100.0 
Memorandum item:     
Total quota413.4  413.4  413.4  100.0 


Technical Memorandum of Understanding for the Proposed Program to be Supported by The PRGF-EFF Arrangements

March 28, 2003

1. This memorandum sets out a framework for monitoring the proposed program for 2003 to be supported by arrangements under the Poverty Reduction and Growth Facility (PRGF) and Enhanced Fund Facility (EFF). It specifies the proposed quantitative performance criteria and indicative targets and the content and frequency of the data to be provided for monitoring the financial program.

I. Fiscal Targets

A. Performance Criterion on Net Domestic Financing of the Central Government Budget

(In billions of rupees)

Flows of net domestic financing at the end of: 
 January 1, 2002-December 31, 2002 (actual)125
Flows of net domestic financing (cumulative balance from January 1, 2003): 
 March 31, 2003 (indicative target)    291
 June 30, 2003 (performance criterion)  44
 September 30, 2003 (indicative target)  65
 December 31, 2003 (performance criterion)  74

2. Net domestic financing is defined as net credit to the government by the banking system (i.e. CBSL plus deposit money banks) and the net change in holdings of treasury bills and other government securities by the non-bank sector. For the purpose of program monitoring, the flow of net domestic financing (NDF) of the central government budget would be the sum of the net receipts (in book value terms) of the following government debt instruments (a) Rupee securities, (b) Treasury Bills, (c) Treasury Bonds, (d) Treasury Certificates of Deposits, (e) Other rupee-denominated government paper, (f) Provisional advances from the CBSL, (g) and the net change in the stock of debt of other instruments—which consist of overdraft, import bills, syndicated loans with Peoples Bank and Bank of Ceylon less government deposits with the CBSL, People's Bank, and Bank of Ceylon. The reporting requirement for NDF appears in Table 6. The data on the instruments (a) through (e) will be provided by the government's public debt office and data on (f) and (g) will be based on the balance sheet data of Central Bank of Sri Lanka (CBSL), People's Bank, and Bank of Ceylon as provided by the CBSL. For program purposes, foreign-currency denominated loans and bonds issued by the government during the program period and held by residents will be excluded from net domestic financing. Central government is defined here to include line ministries, departments and public institutions.

The following adjustments will apply:

3. The ceiling on net domestic financing will be adjusted upward/downward by the shortfall/excess of rupee equivalent of foreign program financing as set out in Table 2 (memorandum item). However, the upward adjustment for shortfalls in foreign program financing will be limited to the rupee equivalence of $100 million using the program exchange rate in Table 4. Moreover, foreign program financing that increases NIR of the Central Bank of Sri Lanka (CBSL) but does not affect net credit to government (NCG) from the banking system and net domestic financing (NDF) of the budget (such as the DST's Yen Revolving balance), would be excluded from foreign program financing when determining the adjuster for both NCG and NDF.

4. The ceiling on net domestic financing will be adjusted downwards by the full amount of any excess privatization receipts beyond the programmed amounts in Table 1. In case of shortfalls in privatization receipts, the upward adjustment in the ceiling would be limited to 50 percent of the shortfall. Privatization receipts in foreign currency will be converted into rupees using the program exchange rates in Table 4. The same adjusters on changes in net domestic financing of central government will also apply to the indicative target on net claims on government in Table D below.

B. Indicative Target on the Primary Fiscal Balance

(In billions of rupees)

Cumulative balance from January 1, 2002 to: 
 December 31, 2002 (actual)-23
Cumulative balance from January 1, 2003 to: 
 March 31, 2003 (indicative target)    1
 June 30, 2003 (indicative target)  -2
 September 30, 2003 (indicative target)  -1
 December 31, 2003 (indicative target)  -4

5. Government primary fiscal balance is on a cash basis and is defined as the overall central government fiscal deficit minus interest payments. For monitoring purposes, primary fiscal balance excludes grants and privatization receipts. The ceiling on government primary balance is cumulative from the start of the fiscal year. However, the government's primary balance should also broadly equal the sum of net foreign financing (including grants), net bank financing, and nonbank financing and privatization proceeds as recorded by the Public Debt Department and Economic Research Department, Central Bank of Sri Lanka, minus interest payments. For program purposes, interest payments in the Budget will include interest payments on all government debt (including overdraft).

C. Indicative Target on the Central Government Revenue

(In billions of rupees)

Cumulative balance from January 1, 2002 to: 
 December 31, 2002 (actual)261
Cumulative balance from January 1, 2003 to: 
 March 31, 2003 (indicative target)  73
 June 30, 2003 (indicative target)145
 September 30, 2003 (indicative target)222
 December 31, 2003 (indicative target)304

6. Central government revenue is defined as the central government revenue as reported in the treasury accounts (economic classification), and excludes foreign grants and privatization receipts. The floor on central government revenue is cumulative from the start of the fiscal year.

D. Indicative Target on Net Claims on the Government by the Banking System

(In billions of rupees)

Outstanding stock as of : 
 December 31, 2002 (actual)193
Cumulative balance from January 1, 2003 to: 
 March 31, 2003 (indicative target)189
 June  30, 2003 (indicative target)184
 September 30, 2003 (indicative target)180
 December 31, 2003 (indicative target)176

7. Net claims on government by the banking system is defined as the difference between banks' claims on government, the deposits of government, and the central and provincial governments with the banking system. The ceiling on net claims on government is cumulative from the start of the fiscal year. The adjusters to net domestic financing will also apply to the indicative target net claims on government. In addition, the foreign currency denominated debt component of net claims on government will be converted to rupees at the programmed exchange rate in Table 4. As for net domestic financing, for program purposes, from January 1, 2003, foreign-currency denominated loans and bonds issued by the government during the program and held by resident banks will be excluded from the net claims on government that is reported in the monetary survey.

E. Indicative Target on Credit to Public Corporations by the Banking System

(In billions of rupees)

Outstanding stock as of : 
 December 31, 2002 (actual)43
 March 31, 2003 (indicative target)44
 June  30, 2003 (indicative target)44
 September 30, 2003 (indicative target)44
 December 31, 2003 (indicative target)33

8. Credit to public corporations by the banking system is defined as credit of the banking system to public corporations. It comprises both credit from deposit banking units and from foreign currency banking units. The foreign currency denominated debt component of credit to public corporations will be converted to rupees at the programmed exchange rate in Table 4. The list of public corporations refers to those companies that are currently classified as public corporations under the CBSL's classification in the monetary survey (Table 3).

II. Monetary Targets

A. Performance Criterion on Net Domestic Assets of the CBSL

(In billions of rupees)

Outstanding stock as of : 
 December 31, 2002 (actual)9.0
 March 31, 2003 (indicative target)9.2
 June  30, 2003 (performance criterion)2.4
 September 30, 2003 (indicative target)0.4
 December 31, 2003 (performance criterion)-1.3 

9. Net domestic assets of the CBSL is defined as the difference between reserve money and net foreign assets of the CBSL valued in rupee. Reserve money is defined below in Section II.B. Net foreign assets of the CBSL are the net claims on nonresidents, in all currency denominations and government (net). For program monitoring purposes, net foreign assets will be calculated using the exchange rate given in Table 4.

The following adjustments will apply:

10. The NDA ceiling is based on a baseline path of NFA that excludes reserve losses on forwards (III.A). The NDA ceiling will be adjusted upward/downward by the shortfall/excess of rupee equivalent of foreign program financing as set out in Table 2 using the program exchange rate in Table 4. However, the upward adjustment for shortfalls in foreign program financing will be limited to the rupee equivalence of $100 million using the program exchange rate in Table 4. Foreign program financing is as defined in subsection III (A) below. The NDA ceiling will also be adjusted for DST's Special Dollar and Yen Revolving balance that are kept abroad and are included in the program definition of, NIR (see III. A below).

11. The NDA ceiling will be adjusted downward by the full amount of any excess privatization receipts beyond the programmed amounts in Table 1. In case of shortfalls in privatization receipts, the upward adjustment in the ceiling would be limited to 50 percent of the shortfall. Privatization receipts in foreign currency will be converted into rupees using the program exchange rates in Table 4.

12. Changes in required reserve regulations will modify the NDA ceiling according to the formula:

ΔNDA = ΔrB0 + r0ΔB + ΔrΔB

where r0 denotes the reserve requirement ratio prior to any change; B0 denotes the programmed reserve money base in the period prior to any change; Δ r is the change in the reserve requirement ratio; and Δ B denotes the immediate change in the reservable base as a result of changes in its definition.

B. Indicative Target on Reserve Money of the CBSL

(In billions of rupees)

Outstanding stock as of: 
 December 31, 2002 (actual)126
 March 31, 2003 (indicative target)133
 June  30, 2003 (indicative target) 135
 September 30, 2003 (indicative target)138
 December 31, 2003 (indicative target)143

13. Reserve money of the CBSL consists of currency in circulation (with banks and with the rest of the public), and financial institutions' deposits at the CBSL (only deposits in domestic currency), and government agencies deposits (as defined in CBSL's balance sheet in Table 5). As of end-December 2002, reserve money defined in this manner stood at Rs 126 billion. If any bank fails to meet its legal reserve requirement then reserve money will be adjusted upwards to the extent of any shortfall in compliance with the requirement.

14. The ceiling on reserve money will be adjusted for changes in reserve regulations in line with the adjustment generated to the NDA limit.

III. External Sector Targets

A. Performance Criterion on Net International Reserves of the CBSL

(In millions of U.S. dollars)

Outstanding stock as of : 
 December 31, 2002 (actual)1,277
 March 31, 2003 (indicative target)1,286
 June  30, 2003 (performance criterion)1,376
 September 30, 2003 (indicative target)1,429
 December 31, 2003 (performance criterion)1,505

15. For the purpose of monitoring the PRGF-EFF program, net international reserves of the CBSL is defined as the difference between its gross foreign assets and liabilities, both expressed in terms of market values. Gross foreign assets of the CBSL consists of monetary gold, foreign exchange balances held outside Sri Lanka, foreign securities (valued in market prices), foreign bills purchased and discounted, net IMF position and SDR holdings, Crown Agent's credit balance, DSTs' Special Dollar and Yen Revolving balance. All foreign currency nondollar denominated reserve balances will be converted into U.S. dollars at programmed exchange rates specified in Table 4 below to reflect valuation adjustment. Excluded from gross foreign assets will be participation in international financial institutions, holdings of nonconvertible currencies, holdings of precious metals other than monetary gold, and claims on residents (e.g., statutory reserves on foreign deposits of commercial banks) pledged, non-liquid, collateralized or otherwise encumbered assets (such as the government's war risk insurance deposit with Lloyds during 2001/02), claims in foreign exchange arising from derivative transactions (such as futures, forwards, swaps and options). Gross foreign liabilities are all foreign currency denominated liabilities, the use of Fund credit, and Asian Clearing Union debit balance and commitments to sell foreign exchange arising from derivatives such as futures, forwards, swaps, and options.

The following adjustments will apply:

16. The NIR floor will be adjusted upward by the full amount of excess privatization receipts in foreign currency compared with the programmed amount in Table 1 and downward by shortfall in privatization receipts in foreign currency, but the downward adjustment will be equal to 50 percent of the shortfall; adjusted downward/upward by the shortfall/excess of foreign program financing as set out in Table 2 but the downward adjustment for shortfalls in foreign program financing will be limited to $100 million for each test date. Foreign program financing is defined to include balance of payments support, including adjustment loans from multilateral creditors other than the Fund, balance of payments support from bilateral creditors, loans from private creditors (including commercial banks) and rescheduling of medium- and long-term public and publicly-guaranteed debt. Thus, foreign program financing as defined above, is expected to augment CBSL's reserves without an immediate expected corresponding payment outflow. For program purposes, from January 1, 2003, foreign-currency denominated loans and bonds issued by the government and held by domestic residents will be treated as foreign program financing.

B. Performance Criterion on New Nonconcessional External Debt

(In millions of U.S. dollars)

Cumulative balance from January 1, 2002 to: 
 December 31, 2002 (actual)242
 Cumulative balance from January 1, 2003  
 March 31, 2003 (indicative target)450
 June 30, 2003 (performance criterion)510
 September 30, 2003 (indicative target)510
 December 31, 2003 (performance criterion)510

17. Contracting or guaranteeing of new medium and long-term nonconcessional external debt is defined as contracting or guaranteeing new nonconcessional external debt by the non-financial public sector (all central and provincial government ministries and departments, public corporations and institutions, and the CBSL) with an original maturity of more than one year (valued at programmed cross exchange rates as defined in Table 4). The program ceiling of $510 million for 2003 includes a Citibank loan of $100 million and another $270 million of loans that Sri Lanka plans to contract with Japan Bank for International Cooperation (JBIC). Both loans are expected to be contracted by end-March 2003. This debt will also include foreign currency denominated loans and bonds contracted with residents. Nonconcessional debt is defined as borrowing containing a grant element of less than 35 percent on the basis of currency-specific discount rates based on the OECD commercial interest reference rates. For maturities of less than 15 years, the grant element would be calculated based on six-month CIRR averages, while for maturities longer than this, the grant element would be based on ten-year CIRR averages. This performance criterion applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85), August 24, 2000) but also to commitments contracted or guaranteed for which value has not been received. Excluded from this performance criterion are credits extended by the IMF and program financing from IBRD and AsDB, and government counter guarantees on project loans from both IBRD and AsDB, as well as changes in indebtedness resulting from rescheduling operations or rollovers. Debt falling within the limit shall be valued in U.S. dollars at the exchange rate prevailing at the time of the contract is entered into, or guarantee issued.

C. Performance Criterion on Stock of Short-Term External Debt

(In millions of U.S. dollars)

 December 31, 2002 (actual)  0
 March 31, 2003 (indicative target)25
 June 30, 2003 (performance criterion)25
 September 30, 2003 (indicative target)50
 December 31, 2003 (performance criterion)50

18. Stock of short-term external debt outstanding is defined as debt with original maturity of up to one year owed or guaranteed by the non-financial public sector (all central and provincial government ministries and departments, public corporations and institutions, and the CBSL) (valued at programmed cross exchange rates as defined in Table 4). This debt will also include foreign currency denominated loans and bonds contracted by the non-financial public sector with residents. The term debt is defined as set forth in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85), August 24, 2000), but excludes normal import-related credits, forward contracts, swaps and other future market contracts. The ceilings also apply to debt instruments with put options that would be triggered within one year after the contracting date.

19. The program's performance criterion on nonaccumulation of external payment arrears is continuous throughout the program period. External payments arrears are defined as overdue payments (interest and principal payments) on short-term debt in convertible currencies with an original maturity of up to and including one year (spot, money market, letters of credit) and medium- and long-term debt contracted or guaranteed by the government. As of end-December 2002, there were no reported external payment arrears.  

IV. Structural Conditions

20. The term bringing to the point of sale (MEFP Table 2) means the authorities will have submitted to Cabinet a sale and purchase agreement, including the chosen buyer, final price and other financial and technical understandings by the relevant test date. That agreement will have been endorsed by the Cabinet Appointed Tender Board and approved by the Attorney General. However, since the condition on Sri Lanka Insurance Corporation (SLIC) is a prior action, this implies that submission to the cabinet would have to be done five business days before the Board meeting.

21. Additional specifications of the restructuring of Peoples Bank's March 2004 structural benchmark would be revisited during the first review of the program.

V. Data Reporting Requirements

22. For the purpose of monitoring the fiscal performance under the program, data will be provided in the format as shown in Tables 67 and 8.

23. For the purpose of external sector performance under the program, data will be provided in the format shown in Tables 9 and 10.

24. Sri Lanka shall provide the Fund, through reports at intervals or dates requested by the Fund, with such information as the Fund requests in connection with the progress of Sri Lanka in achieving the objectives and policies set forth in the letter. All the program monitoring data would be provided by the Ministry of Finance and the Central Bank of Sri Lanka (CBSL). The data on net domestic financing will be reported to Fund both in terms of net receipts of domestic financing (as in I. A above) and the stock of net domestic debt (as earlier reported). Data on gross foreign assets and gross foreign liabilities would be provided at market prices. All the data relating to the above programmed targets will be furnished within six weeks after the end of each month. For the primary balance, preliminary estimates will be available within six weeks and firmer estimates after 10 weeks.

Table 1. Privatization Receipts

Privatization receipts (for NDF and NCG adjuster)    
Cumulative from January 1, 2003 (in billions of rupees)01012  17
Privatization receipts (for NIR and NDA adjuster)    
Cumulative from January 1, 2003 (in millions of US dollars)0  0  0125

Table 2. Foreign Program Financing Assumption; Cumulative from January 1, 2003
(In millions of U.S. dollars)

Multilateral creditors0110120170
   World Bank0110110110
   Asian Development Bank0    0  10  60
Bilateral creditors0    0  50  95
Private creditors 0    0    0    0
Total 0110170265

Memorandum item:

Foreign program financing (for NDF and NCG purposes)0110120200

Table 3. List of Public Corporations as Defined
by the Central Bank of Sri Lanka1

1. Ceylon Electricity Board
2. Ceylon Petroleum Corporation
3. C.W.E.
4. Ceylon Shipping Corporation
5. State Pharmaceuticals Corporation
6. Building Materials Corporation
7. Ceylon Plywood Corporation
8. National Livestock Development Board

1Does not include Sri Lanka Telecom and Sri Lankan Airlines—companies in which the state has large equity shares but which are privately operated.

Table 4. Exchange Rates and Gold Prices to be Used
Under the Program1

 Rupees per Unit of Foreign Currency

U.S. dollar100
Japanese yen         0.83
Pound sterling160
Gold prices (U.S. dollars per ounce)350

1Currencies not shown here will be converted first into U.S. dollars using the official rate used by Fund's Treasury Department on January 28, 2003.

Table 5. Balance Sheet of the Central Bank of Sri Lanka1

Net foreign assets
   Foreign assets
      Cash and balance abroad
      Foreign securities
      Claims on ACU
      IMF related assets
      Foreign currency reserve
   Foreign liabilities
      IMF and nonresident account
      Liabilities to ACU
   Government (net)

Net domestic assets
   Claims on government
      Treasury bills and bonds
      Cash items in collection
   Government deposits
   Claims on commercial banks
      Medium and long term
      Short term

Other items net

Reserve money
   Currency in circulation
   Commercial bank deposits
   Government agencies deposit

1 As agreed for the purpose of monitoring the program.

Table 6. Net Domestic Financing of Central Government of Sri Lanka1
Net receipts (book value) for domestic financing
   Rupee securities
   Treasury Bills
   Treasury Bonds
   Sri Lanka government bonds (held by residents- commercial banks and others)
   Treasury Certificates for Central Bank
   Provisional Advances for Central Bank
   Other liabilities with People's Bank and Bank of Ceylon net of Government deposits
      Overdraft with People's Bank
      Overdraft with Bank of Ceylon
      Government deposits with CBSL
      Government deposits with Bank of Ceylon
      Government deposits with People's Bank
      Import Bills—Bank of Ceylon
      Imports Bills—People's Bank
      Syndicated Loans with Bank of Ceylon
      Syndicated Loans with People's Bank

1Expressed in terms of net flows. As agreed for the purpose of monitoring the program.

Table 7. Revenue Collection(In millions of rupees)
Total Revenue
 Tax revenue
  Income taxes
  Turnover taxes/VAT
   Of which: Imports
  Excise taxes
  Debits tax
  Taxes on international trade
  Stamp duty
  License fee/motor vehicles
 Nontax revenue
  Property income
   CB profits
   Profits and dividends
  Fees and charges

Table 8. Expenditures(In millions of rupees)
Total expenditure and net lending
 Current expenditure
  Civil service wages and salaries
  Security-related wages and salaries
  Goods and services
   Of which: Military
  Subsidies and transfers
   Of which: Pensions
   Local and provincial governments
  Interest payments
  Capital expenditure and net lending
   Rupee funds (incl. counterpart funds)
   Foreign financed
  Overall balance (excl. grants and privatization)
  Overall primary balance (excl. grants and privatization)

Table 9. Net International Reserves(In millions of U.S. dollars)
DateCentral Bank
Foreign Exchange Balance.Reserve Position with the FundForeign Currency Deposit due to SRR1TotalCrown Agent's Credit BalanceDST's Special Dollar Revenue BalanceTotalTotal Gross Official Reserves DepositsAsian Clearing UnionPRGFTotal


1Foreign currency deposits held by the CBSL on account of statutory reserve requirement on foreign currency deposits by commercial banks.

Table 10. Contracting or Guaranteeing of New Nonconcessional External Debt
by Non-Financial Public Sector

(In millions of U.S. dollars)
CreditorName of
Date of
Interest rateCurrencyAmountDisbursement


The NDF target for end-March 2003 assumes that $60 million of the $100 million Citibank loan would be used to repay the government's outstanding import bills at the Bank of Ceylon. In the event that this loan is not disbursed by end-March, 2003, the NDF ceiling for end-March would be adjusted upwards by the rupee equivalent of $60 million using the program exchange rate in Table 4.