IMF Finalizes First Review of Sri Lanka's Extended Fund Facility

The IMF Board completed the first review under the 48-month Extended Fund Facility with Sri Lanka, providing the country with access to SDR 254 million (about US$337 million) to support its economic policies and reforms.
Sri Lanka's performance under the program was satisfactory. All but one performance criteria and all but one indicative targets were met at end-June. Most structural benchmarks due by end-October 2023 were either met or implemented with delay. Notably, the authorities published the Governance Diagnostic Report, making Sri Lanka the first country in Asia to undergo the IMF Governance Diagnostic exercise.
The authorities have made commendable progress toward restoring debt sustainability, raising revenue, rebuilding reserves buffers, reducing inflation, and safeguarding financial stability. Strong commitment to improving governance and protecting the poor and vulnerable remains critical.

Washington, DC: The Executive Board of the International Monetary Fund (IMF) completed today the first review under the 48-month Extended Fund Facility (EFF) Arrangement. The completion of the first review allows for an immediate disbursement of SDR 254 million (about US$337 million), bringing the total IMF financial support disbursed so far to SDR 508 million (about US$670 million).

The total amount of Sri Lanka's EFF Arrangement is SDR 2.286 billion (about US$3 billion) as of the time of program approval on March 20, 2023 (seePress Release). The program supports Sri Lanka's efforts to restore macroeconomic stability and debt sustainability, safeguard financial stability, and enhance growth-oriented structural reforms.

Following the Executive Board discussion on Sri Lanka, Mr. Kenji Okamura, Deputy Managing Director, issued the following statement:

''Macroeconomic policy reforms are starting to bear fruit and the economy is showing tentative signs of stabilization, with rapid disinflation, significant revenue-based fiscal adjustment, and reserves build-up.

''Performance under the EFF-supported program has been satisfactory. All quantitative performance criteria for end-June were met, except the one on expenditure arrears. All indicative targets were met, except the one on tax revenues. Most structural benchmarks were either met or implemented with delay by end-October 2023. The publication of a Governance Diagnostic Report, the first in Asia and a structural benchmark under the program, is a commendable first step towards addressing deep-rooted corruption weaknesses. Continued commitment to improving governance and timely implementation of the report's recommendations can deliver tangible economic gains to all citizens.

''Sri Lanka's agreements-in-principle with the Official Creditors Committee and Export-Import Bank of China on debt treatments are consistent with the EFF targets. They are an important milestone putting Sri Lanka's debt on the path towards sustainability. A swift completion and signature of the Memoranda of Understanding with the official creditors is important. Timely implementation of the agreements, together with reaching a resolution with external private creditors on comparable terms, should help restore Sri Lanka's debt sustainability over the medium term.

''To ensure a full and swift recovery, sustaining the reform momentum and strong ownership of reforms is of paramount importance. Key priorities include advancing revenue mobilization, aligning energy pricing with costs, strengthening social safety nets, rebuilding external buffers, safeguarding financial stability, eradicating corruption, and enhancing governance.

''Reinforcing the revenue-based fiscal consolidation supported by revenue administration reforms is critical to recover from program slippages and promote a break from past policy shortcomings.

''The Central Bank of Sri Lanka should continue to focus on the multi-pronged disinflation strategy to safeguard the credibility of its inflation targeting regime. Accumulating reserves, supported by exchange rate flexibility, remains an important priority under the EFF.

''Implementing the bank recapitalization plan and strengthening financial supervision and crisis management framework are crucial to safeguard financial sector stability.

''Further strengthening the social safety net and protecting social spending remains critical to safeguarding the poor and vulnerable.''

Sri Lanka: Selected Economic Indicators 2020-2028

	2020	2021	2022	2023	2024	2025	2026	2027	2028
				Est.	Projections

GDP and inflation (in percent)
Real GDP	-4.6	3.5	-7.8	-3.6	1.8	2.7	3.0	3.1	3.1
Inflation (average) 1/	4.6	6.0	45.2	17.9	7.9	5.6	5.4	5.3	5.2
Inflation (end-of-period) 1/	4.2	12.1	54.5	4.8	6.6	5.6	5.4	5.3	5.2
GDP Deflator growth	3.3	8.5	48.8	20.4	10.1	6.3	5.4	5.3	5.2
Nominal GDP growth	-1.5	12.3	37.2	16.1	12.1	9.1	8.6	8.5	8.5

Savings and investment(in percent of GDP)
National savings	31.6	33.0	33.4	31.8	30.8	30.5	30.9	31.4	31.4
Government	-8.3	-7.3	-6.2	-6.0	-3.1	-0.9	-0.3	0.3	0.6
Private	39.9	40.3	39.7	37.8	33.9	31.4	31.3	31.1	30.8
National investment	33.0	36.7	34.4	30.3	31.6	31.6	32.0	32.4	32.3
Government	6.2	7.4	7.0	4.1	5.1	5.1	5.0	5.0	5.0
Private	26.8	29.4	27.4	26.2	26.5	26.5	27.0	27.4	27.2
Savings-Investment balance	-1.4	-3.7	-1.0	1.5	-0.8	-1.1	-1.1	-1.0	-0.8
Government	-14.5	-14.7	-13.3	-10.1	-8.2	-6.0	-5.3	-4.7	-4.4
Private	13.1	11.0	12.3	11.6	7.5	4.9	4.3	3.8	3.6

Public finance (in percent of GDP)
Revenue and grants	8.8	8.3	8.3	10.2	13.0	15.0	15.0	15.1	15.2
Expenditure	21.0	20.0	18.5	19.0	20.3	20.3	19.7	19.3	19.1
Primary balance	-5.9	-5.7	-3.7	-0.7	0.8	2.3	2.3	2.3	2.3
Central government balance	-12.2	-11.7	-10.2	-8.8	-7.3	-5.3	-4.7	-4.2	-3.9
Central government gross financing needs	26.1	31.0	33.9	27.8	25.3	23.0	19.8	17.1	12.3
Central government debt	96.7	102.7	115.5	107.8	110.3	111.4	110.8	108.0	104.6
Public debt 2/	105.1	114.9	125.8	114.1	115.9	116.3	115.1	111.7	107.9

Money and credit (percent change, end of period)
Reserve money	3.4	35.4	3.3	9.0	16.9	9.1	8.6	8.5	8.5
Broad money	23.4	13.2	15.5	7.0	18.2	9.1	8.6	8.5	8.5
Domestic credit	24.6	19.5	18.8	5.5	10.6	3.0	2.0	3.7	3.2
Credit to private sector	6.5	13.1	6.4	0.3	7.7	8.7	9.4	9.6	9.5
Credit to private sector (adjusted for inflation)	1.9	7.2	-38.8	-17.6	-0.2	3.2	4.0	4.3	4.3
Credit to central government and public corporations	53.6	26.5	31.1	9.8	12.8	-1.0	-3.7	-1.5	-3.0

Balance of Payments (in millions of U.S. dollars)
Exports	10,048	12,499	13,106	12,365	13,555	14,377	15,111	15,846	16,651
Imports	-16,055	-20,638	-18,291	-17,887	-20,718	-23,002	-24,322	-25,144	-26,049
Current account balance	-1,187	-3,285	-744	1,232	-634	-908	-879	-846	-764
Current account balance (in percent of GDP)	-1.4	-3.7	-1.0	1.5	-0.8	-1.1	-1.1	-1.0	-0.8
Current account balance net of interest (in percent of GDP)	0.5	-2.1	0.1	2.9	1.2	0.9	0.9	1.1	1.3
Export value growth (percent)	-15.9	24.4	4.9	-5.7	9.6	6.1	5.1	4.9	5.1
Import value growth (percent)	-19.5	28.5	-11.4	-2.2	15.8	11.0	5.7	3.4	3.6

Gross official reserves (end of period)
In millions of U.S. dollars	5,664	3,139	1,898	3,806	5,346	7,477	9,894	13,525	15,320
In months of prospective imports of goods & services	3.2	2.0	1.2	2.0	2.6	3.4	4.3	5.7	6.2
In percent of ARA composite metric	46.0	24.7	16.4	33.2	44.7	59.9	77.1	99.7	109.6
Usable Gross official reserves (end of period) 3/
In millions of U.S. dollars	5,664	1,565	462	2,371	3,910	7,477	9,894	13,525	15,320
In months of prospective imports of goods & services	3.2	1.0	0.3	1.3	1.9	3.4	4.3	5.7	6.2
In percent of ARA composite metric	46.0	12.3	4.0	20.7	32.7	59.9	77.1	99.7	109.6
External debt (public and private)
In billions of U.S. dollars	53.4	58.4	57.4	53.8	55.5	57.7	59.9	63.4	65.1
As a percent of GDP	63.2	65.9	76.7	64.7	68.0	70.4	71.8	72.7	70.3

Memorandum items:
Nominal GDP (in billions of rupees)	15,672	17,600	24,148	28,033	31,422	34,291	37,226	40,397	43,812
REER appreciation (percent, period average)	0.6	-6.0	-4.8	-5.2	-3.7	-5.8	-4.0	-1.5	0.0
Exchange Rate (period average)	185.6	198.8	322.6	…	…	…	…	…	…
Exchange Rate (end of period)	186.4	200.4	363.1	…	…	…	…	…	…
Sources: Data provided by the Sri Lankan authorities; and IMF staff estimates.
1/ Colombo CPI.

2/ Comprising central government debt, publicly guaranteed debt, and CBSL external liabilities

(i.e., Fund credit outstanding and international currency swap arrangements).

3/ Excluding PBOC swap ($1.4bn in 2022) which becomes usable once GIR rise above 3 months of previous year's import cover.

/Public Release. This material from the originating organization/author(s) might be of the point-in-time nature, and edited for clarity, style and length. Mirage.News does not take institutional positions or sides, and all views, positions, and conclusions expressed herein are solely those of the author(s).View in full here.

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