Today, the IMF Executive Board approved a 48-month extended arrangement under the Extended Fund Facility (EFF) of SDR 2.286 billion (about US$3 billion) to support Sri Lanka’s economic policies and reforms (See Press Release No. 23/79).
Sri Lanka has been facing a severe economic crisis as a result of past policy missteps and economic shocks. We have been deeply concerned about the impact of the crisis on the Sri Lankan people, particularly the poor and vulnerable groups, and about the economic costs of the delay in the country’s access to external financing.
Today’s Board approval marks an important step towards the resolution of the crisis —Sri Lanka will immediately receive an initial disbursement of about US$330 million from the EFF arrangement, which is expected to catalyze new external financing including from the Asian Development Bank and the World Bank.
The reform program supported under the EFF arrangement is built on strong policy measures and prioritizes : (i) an ambitious revenue-based fiscal consolidation, accompanied by stronger social safety nets, fiscal institutional reforms, and cost-recovery based energy pricing to ensure the state’s ability to support all its essential expenditures; (ii) restoration of public debt sustainability, including through a debt restructuring to ensure stable financing of the government’s operations; (iii) a multi-pronged strategy to restore price stability and rebuild reserves under greater exchange rate flexibility in order to alleviate the burden of inflation, particularly on the poor, to foster an environment of investment and growth, and to ensure Sri Lanka’s ability to purchase essential goods from abroad; (iv) policies to safeguard financial sector stability to ensure that the financial sector can play its key role in supporting economic growth; and (v) structural reforms to address corruption vulnerabilities and enhance growth.
Commendably, Sri Lanka has already started implementing these challenging policy actions. It is now essential to continue the reform momentum under strong ownership by the authorities and the Sri Lankan people more broadly.
The economic impact of the reforms on the poor and vulnerable needs to be mitigated with appropriate measures. In this regard, we welcome the authorities’ firm commitment to strengthen social safety nets, including through a minimum spending floor, well-targeted spending through a new Social Registry, and establishment of objective eligibility criteria. Tax reforms under the program are designed to be progressive, that is, ensuring greater contributions from high-income earners. Efforts to increase tax revenues should be pursued in a growth-friendly manner while protecting the poor and most vulnerable.
Sri Lanka’s public debt, at 128 percent of GDP as of end-2022, is unsustainable. The country is in arrears to all its external creditors. IMF Board approval of assistance to Sri Lanka required assurances from official bilateral creditors that they will provide debt relief and/or financing to restore debt sustainability consistent with the program, as well as an assessment that the authorities are making good faith efforts to reach a collaborative agreement with private creditors. These requirements were met ahead of the Board meeting.
It is now important for the Sri Lankan authorities and creditors to closely coordinate and make swift progress towards a debt treatment that restores debt sustainability under the EFF-supported program. The President’s recent open letter to official bilateral creditors includes commitments to transparency and comparability of treatment for all external creditors, which should help facilitate this process. IMF staff will continue to assist the authorities with creditor coordination in line with the IMF’s policies.
Finally, we emphasize the importance of anti-corruption and governance reforms as a central pillar of the EFF-supported program —they are indispensable to ensure the hard-won gains from the reforms benefit the Sri Lankan people. The authorities have committed to fundamentally improve public financial management and strengthen the anti-corruption legal framework in line with the United Nations Convention against Corruption. In addition, the IMF is conducting an in-depth governance diagnostic exercise, which will assess corruption and governance vulnerabilities in Sri Lanka and provide prioritized and sequenced recommendations. Sri Lanka will be the first country in Asia to undergo a governance diagnostic exercise by the IMF. We look forward to further engagement and collaboration with stakeholders and civil society organizations on this critical reform area.
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