- Deviating from IMF path would be dangerous
- Vast improvement in economy
- People will benefit from reforms
The Sunday Observer spoke to State Minister of Finance Shehan Semasinghe following his visit to China with Prime Minister Dinesh Gunawardena, where both sides focused on dent restructuring. Minister Semasinghe outlined the importance of adhering to International Monetary Fund (IMF) guidelines at this stage to expedite the process of economic recovery. He warned that any deviation from this intricate process risks extensive damage to the economy.
Q: The Government has taken a significant stride forward by securing the third loan tranche through a Staff Level Agreement (SLA) agreement reached with the International Monetary Fund (IMF). Your comment?
A: We have achieved a significant milestone in our economic journey. We successfully underwent the second review through our Extended Fund Facility (EFF) with the IMF and reached a SLA. This accomplishment is pivotal in fostering the revival of our country’s economy.
After completing the first review, immediate consensus on a staff agreement proved elusive. However, after extensive deliberations, we successfully reached a SLA. The significance of the second review lies in honouring our commitments and solidifying a staff agreement to progress further.
Just 18 months ago, our country faced severe challenges: prolonged power outages, fuel shortages, a staggering 70 percent inflation rate, and abnormal spikes in commodity prices. The Central Bank of Sri Lanka (CBSL) had depleted foreign reserves of only around US$ 3 million, hindering essential exports, while expatriate remittance inflows dwindled. These dire circumstances culminated in a political revolution.
With President Ranil Wickremesinghe assuming leadership, political stability was restored, providing a foundation for addressing these pressing issues.
Q: In the face of economic contraction and without much support from the Opposition, the Government found itself compelled to persevere and redouble its efforts to sustain the journey forward. Your comment?
A: The transformation is evident when we consider today’s situation. Inflation, previously at a staggering 70 percent, has remarkably decreased to just 5.1 percent as of February. Food inflation too has gone down drastically. Upon assuming office, President Ranil Wickremesinghe inherited an exchange rate of Rs. 330 to the US Dollar, which has now stabilised and approached the Rs. 300 mark. There is optimism that further efforts will lead to a potential reduction beyond this threshold in the future.
After enduring six consecutive quarters of economic contraction, there has been a notable turnaround. The severe 12 percent contraction experienced in 2022 diminished to 3 percent by 2023. Despite facing contractions in the initial two quarters of 2023, the economy displayed resilience with growth rates of 2.6 percent in the third quarter and a robust 4.5 percent in the fourth quarter.
The current state of the economy owes much to the support provided by entities like the IMF, World Bank, other financial institutions and friendly nations. However, it is essential to acknowledge that progress was made possible through the dedicated efforts of the President and the Government, who worked tirelessly to propel the economy forward.
Q: Isn’t it a significant milestone that the IMF has commended the management of our country’s fiscal system and monetary policy?
A: In our country’s past, we underwent challenging reforms, necessitating unprecedented decisions to pave the way for a favourable economic landscape. The IMF has shown appreciation for our adept management of both the financial system and monetary policy. Our initiatives to curb inflation, fortify the exchange rate, and bolster the public financial system have garnered praise.
In 2023, Government revenue saw an increase ranging from 8 percent to 11 percent while managing fiscal revenue. The aim is to elevate this figure to 15 percent, though the foremost challenge lies in the loss of financial market access during the economic downturn. This necessitated raising funds for procuring essential goods from the local market, resulting in considerable interest payments.
Notably, total Government expenditure in 2023 amounted to 20 percent of GDP. Allocating 9 percent to interest payments underscores the importance of instilling confidence in the global economy to effectively manage this aspect. Hence, the attainment of this SLA serves as a positive signal, helping to dispel uncertainties and bolster trust in our economic stability on the world stage.
Q: Could you provide the specific date when the amount is expected to be received from the IMF in the third quarter?
A: The approval of an amount totalling US$ 337 million is anticipated at the upcoming IMF Executive Board meeting. Following the submission of these agreements to the Executive Board and subsequent approval, the third installment of US$ 337 million will be accessible.
Collaboration among the IMF, the World Bank, and the Asian Development Bank (ADB) is crucial. Other financial institutions can only disburse these funds after the IMF agreement is in place. We have good links with all these institutions.
Q: What favourable outcomes can we anticipate in the future as a result of the SLA?
A: Presently, we have successfully provided assurances of reliability to our creditors by converting bilateral agreements on debt restructuring into memorandums of understanding (MOUs).
Negotiations for debt restructuring involving Japan, India, and France are underway with the Official Creditors’ Committee and the Paris Club. Simultaneously, bilateral discussions with China are ongoing. Actually, Prime Minister Dinesh Gunawardena and I discussed this matter with Chinese officials during our visit there just last week.
Entering into a SLA holds the potential to bring an end to these activities. This development is crucial for concluding negotiations with International Sovereign Bond (ISB) holders. The IMF has emphasised the irreversible nature of these reforms, underscoring their importance. Whichever Government comes, they will have to adhere to this program.
Today, people are witnessing the outcomes of these reforms firsthand. Any reversal would risk plunging the economy back into crisis. Notably, Sri Lanka stands as the first Asian country to release a report from the Governance Tribunal, with the related Government program announced in February.
Q: But various parties and individuals continue to voice differing criticisms regarding the IMF process. Your comment?
A: Despite the country’s progress towards a positive economic outlook, various factions are expressing contrasting opinions. Just two or three days before reaching a SLA, a particular organisation claimed that only 33 percent of the IMF agreements had been fulfilled. If the Government had indeed reneged on agreements as alleged by them, how could such a successful SLA have been reached? These individuals must comprehend the situation accurately. Furthermore, they have underestimated the Government’s capabilities.
Q: Did the Opposition issue a statement following their recent meeting with IMF representatives?
A: There was no need to inquire; however, it is notable that even Opposition factions have aligned themselves with the Government’s agenda. Nonetheless, the challenge lies in the absence of proper leadership to guide them through this arduous task.
Q: The Opposition says they will alter the IMF plan if they assume power. Your comment?
A: This is a highly intricate process, which is far from straightforward. We aim to build an economy to meet the needs of 22 million people and tackling future challenges. Unfortunately, they have failed to grasp this reality. Consequently, assertions about changing the Agreement or policies are unfounded. That cannot happen in reality.
Q: Will the receipt of the third IMF loan installment bring relief to the people?
A: The advantage has shifted in favour of the people compared to the exchange rate. This benefit has been reflected in the recent price adjustments for oil, milk powder and electricity, resulting in lower prices compared to previous hikes. To further enhance transparency and identify any undue profiteering, the Minister of Trade should disclose the costs of unloading essential imported goods at Customs as well as the associated taxes on a daily basis. This transparency will shed light on those profiting disproportionately from the people.
Translated by Maneska Borham
