The International Monetary Fund (IMF) has reached a staff-level agreement with the Sri Lankan authorities on economic policies to conclude the third review of the country’s Extended Fund Facility (EFF) economic reform program.
This agreement is a key step towards accessing approximately US$333 million in financing, pending approval by the IMF management and the Executive Board.
Senior Mission Chief for Sri Lanka, Peter Breuer told a media conference at the Central Bank yesterday, “We are pleased to announce that the IMF team reached the staff-level agreement with the Sri Lankan authorities on the third review under the four-year Extended Fund Facility arrangement, which was approved by the IMF Executive Board for SDR 2.3 billion (about US$3 billion) on March 20, 2023.”
He said that the staff-level agreement is contingent on the implementation of prior actions, including the submission of a 2025 Budget that aligns with the program objectives, and on the completion of a financing assurances review.
Deputy Mission Chief Katsiaryna Svirydzenka said, “The new Government’s commitment to the program’s objectives has enhanced confidence and ensures policy continuity. Sustaining the reform momentum is critical to safeguarding the hard-won gains under the program thus far and putting the economy on a path towards durable recovery and stable and inclusive growth.”
Upon completion of the Executive Board review, Sri Lanka would have access to SDR 254 million (about US$333 million), bringing the total IMF financial support disbursed under the arrangement to SDR 1,016 million (approximately US$1,333 million).
Recent economic indicators have shown positive trends, with the economy expanding on average by four percent year-on-year in the four quarters ending in June 2024. Average headline and core inflation remained contained at 0.8 percent and 3.8 percent, during the third quarter.
By the end of October 2024, gross official reserves stood at US$ 6.4 billion, bolstered by considerable foreign exchange purchases by the Central Bank. The program’s performance was strong, with all quantitative performance criteria and indicative targets met for end-June and end-September 2024, although the target on social spending was not met.
Breuer emphasised the importance of continuing responsible fiscal policy, adding, “Maintaining macroeconomic stability and restoring debt sustainability are key to securing Sri Lanka’s prosperity.”
He highlighted the need for revenue mobilisation and spending restraint to prepare the 2025 Budget in line with program parameters, underscoring that revenue administration reforms and improved tax compliance are crucial for ensuring that the burden stemming from the crisis is fairly shared.
He said, “While inflation has decelerated faster than expected, continued monitoring is warranted to ensure sustained price stability and support macroeconomic stability.”
Providing insights regarding the ongoing economic challenges facing the country, and answering the media, Breuer said, “Regrettably, the challenges in Sri Lanka haven’t gotten any less despite the change in Government. The economic challenges, particularly recovering from one of the most severe crises that Sri Lanka has experienced in its history, in 2022, will be felt for quite some time.”
He said that a significant underlying cause of the crisis was the lack of fiscal revenue. “In 2022, tax revenue was around 7 percent of GDP, which is the second lowest in emerging markets.” He referenced a chart included in the staff report from the second review that illustrates this concern, emphasising that recovering from this situation remains a crucial challenge for Sri Lanka. “This is necessary to refinance all that debt that will become due, especially after the debt has been restructured, and new debt will eventually have to be paid,” he said.
He underscored the importance of having the fiscal resources to roll over the debt and access market, adding, “Raising tax revenue remains a key priority while remaining prudent with expenditure.”
Breuer stressed the significance of political stability in the context of economic reforms. “A Government with a strong mandate holds well for political stability. We take comfort from the commitment that this Government has given with respect to persevering with the economic reforms.”
Breuer said, “Macroeconomic stability and restoring that sustainability are really the key ways for Sri Lanka to regain its prosperity and grow out of this crisis.”
Regarding social spending, he said, “It’s important to remember who pays taxes in Sri Lanka. About the top 20 percent of income earners are making all the tax contributions.” He said that the poor do not contribute to taxes and thus, any tax increases primarily affect a specific segment of the population, not the poor.
Breuer acknowledged ongoing discussions about the Government’s social safety net program, ‘Aswasuma,’ adding, “We have been having good discussions about not having been able to meet this minimum spending flow on the social safety net.” He encouraged the government to address the underlying impediments that had obstructed the prompt distribution of funds, adding, “There were good reasons why it wasn’t possible to get this money to the recipients. They needed ID cards to open bank accounts, and these processes took time.”
He stressed the importance of overcoming these barriers to ensure that the funds intended for recipients, in fact, reach them. “This Government has expressed its strong commitment to that same shared goal,” he said.
The IMF team recognised the Government’s critical role in protecting the poor and vulnerable, urging them to meet the program’s minimum spending targets on social safety nets, particularly the ‘Aswesuma’ program.
Svirydzenka stressed the importance of Sri Lanka’s recent Agreement in Principle with bondholders, viewing it as a significant step towards debt sustainability.
“The critical next steps are to complete the commercial debt restructuring and finalise bilateral agreements with official creditors,” she said.
The IMF team engaged with several high-level Government officials, including President and Finance Minister Anura Kumara Dissanayake, Labour Minister Prof. Anil Jayantha Fernando, and Central Bank Governor Dr. P. Nandalal Weerasinghe, representatives from the private sector, civil society, and development partners.
Breuer said, “The new Government’s mandate will reinvigorate governance reforms addressing corruption risks, rebuilding economic confidence, and making growth more robust and inclusive.”
The IMF commended the authorities for their collaboration and looks forward to the successful implementation of the agreed policies.
An International Monetary Fund (MF) team led by Senior Mission Chief for Sri Lanka Peter Breuer, visited Colombo from November 17 to 23.
