Transcript

Transcript of Press Briefing at the Conclusion of the IMF Staff Visit to Sri Lanka

January 19, 2024

PARTICIPANTS:

PETER BREUER

Senior Mission Chief to Sri Lanka

SARWAT JAHAN

Resident Representative in Sri Lanka

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T R A N S C R I P T

MS. JAHAN: Good afternoon, everyone. Welcome to the IMF press briefing on Sri Lanka. I am the IMF Resident Representative. I am the IMF Resident Representative in Sri Lanka. Today I have joining Mr. Peter Breuer, the Senior Mission Chief for Sri Lanka. As you know, the IMF mission team led by Mr. Breuer has been in Sri Lanka since January 11th. Today, Mr. Breuer will start with some opening remarks and then we will turn to you for some questions. Thank you.

MR. BREUER: Thank you Sarwat, and thank you to all of you for being here and for your interest in our work. It's always good for us to engage with you and have these interactions. I'll just give you some opening remarks and then we'll be happy to take your questions.

So we were here from January 11th to today, the 19^th. The Economic Reform Program implemented by the Sri Lanka authorities is yielding the first signs of recovery. Real GDP recorded positive growth of 1.6 percent year on year in the third quarter of 2023, which is the first expansion in six consecutive quarters.

Shortages of essentials have eased and inflation remains contained. Gross international reserves increased by $2.5 billion during 2023 and preliminary data point to improved fiscal revenue collections during the fourth quarter of 2023.

However, challenges remain as these improvements need to translate into improved living conditions for Sri Lanka's people. In this context, sustaining the reform momentum and ensuring timely implementation of all program commitments are critical to rebuilding confidence and putting the recovery on a firm footing that will benefit all people.

Swift progress towards the introduction of a progressive property tax is key to ensuring fair burden sharing while sustaining the revenue-based consolidation. Tax policy measures need to be accompanied by strengthening tax administration, removing tax exemptions, and actively eliminating tax evasion to make reforms more sustainable and to further build confidence among Sri Lanka's creditors to regain debt sustainability to gain their support.

Building on the central bank's success in taming inflation, future monetary policy decisions should remain prudent, with a focus on keeping inflation expectations well anchored. Against continued uncertainty. It remains important to continue rebuilding external buffers through strong reserve accumulation and protecting the poor and the vulnerable through improved targeting and better coverage of cash transfers remains critical.

To safeguard the stability of the financial sector and bolster its capacity to support economic growth, the authorities need to urgently finalize amendments to the Banking act in line with their commitment under the IMF supported program, implement bank recapitalization plans, and strengthen financial supervision and crisis management frameworks.

Following the publication of the IMF Governance Diagnostic Report, it is now imperative for the authorities to adopt their own action plan for implementing the recommendations in the report beyond the priority commitments under the EFF arrangement. At the same time, ensuring an enabling environment for governance and transparency reforms to take place is key to bolstering public confidence and facilitating implementation of these important efforts.

The authorities have made commendable progress with putting debt on a path towards sustainability. The execution of the domestic debt restructuring was an important milestone. A swift completion of final agreements with official creditors and reaching a resolution with external private creditors remain critical. Progress in meeting key commitments under the IMF supported program will be formally assessed in the context of the second review of the EFF arrangement alongside the forthcoming 2024 Article IV Consultation, which will assess Sri Lanka's economic health.

With this, we would like to thank the authorities for the excellent collaboration during the Mission, including during the Mission's visit to the northern and eastern provinces. The visit enriched our understanding of the challenges as well as the potential of Sri Lanka. We reaffirm our commitment to support Sri Lanka for full economic recovery from the crisis. Thank you.

MS. JAHAN: Thank you, Peter. I would like to now open up the floor for some questions. We'll take a few questions together, but when you do have a question, if you could please raise your hand and introduce yourself and also be sure to turn on the mic so that we can hear you.

QUESTIONER: From Ceylon Today Newspapers. Peter, with regard to the discussions you had with the leader of the opposition, what actually transpired? What were the nitty-gritties in that discussion?
QUESTIONER: I would like to pose a question on that as well.

MS. JAHAN: Please introduce yourself.

QUESTIONER: Yeah, my name is Zulfick Farzan from Newsfirst. One of the opposition groups, the NPP, you had a meeting with them and they claimed that they discussed on renegotiating terms with the IMF on the Extended Fund Facility Program that has been introduced for Sri Lanka. Could you please confirm if there was any agreement reached with them on renegotiating terms? And if so, would that also lead the program back to square one? Or where would the program go ahead with. Thank you.

MS. JAHAN: If we can take one more question.

QUESTIONER: Thank you, Uditha from Reuters. Mr. Breuer, the bondholders have complained that talks are not progressing as quickly as they would like. What is your assessment of the debt restructuring progress? Is it evolving as fast as you would like? What are the key sort of gaps that you see, and is there a timeline for the second review please? Thank you.

MS. JAHAN: Great. I'll turn to Peter.

MR. BREUER: Okay, thank you very much. So with respect to engagement with political parties and the elections, so this year it's expected that elections will take place. That happens in many of our member countries and also when IMF supported programs are ongoing. From the IMF's perspective, we are, of course interested in listening to all parties and get different perspectives from all angles as to what views on economic policy are. We are an inclusive institution, and so it's important for us to have a good understanding of what different economic policy perspectives are. So this is the perspective from our point of view, it's important to listen to these. This is, of course of interest to us for what happens after an election. Of course, we're also interested in what happens before an election, as it is important, as I just mentioned in my opening remarks, to adhere to the Economic Reform Program so that Sri Lanka has a chance of emerging from probably its most severe crisis in its history. And as we have now seen, there are good signs that the program is working, that it is having the intended effect of helping Sri Lanka emerge from the crisis, which takes some time.

On the question with respect to the debt restructuring. So there's sort of two important things that need to happen going forward. First, it should be said that having reached agreements in principle with official creditors is an important milestone, and that follows the milestone of having completed the domestic debt operation. So now what needs to be done is to finalize these agreements in principle, or rather to convert them into actual agreements with the official creditors so as to complete that portion of the debt restructuring. And secondly, reach agreements in principle with the commercial creditors where the bondholders are, of course, a significant proportion. So our understanding is that negotiations are ongoing, proposals are being exchanged, and it is important for that process to continue and be completed as quickly as possible. It's our strong expectation that there would be an agreement in principle by the time of the second review.

MS. JAHAN: The question is on when is the second review going to take place.

MR. BREUER: So timeline. So the review cycle in Sri Lanka's program is semi-annual every six months. Sri Lanka just completed the first review in December. The program is off to a good start with that. So we expect the second review to be completed on that cycle. So we would come back here in the Spring of this year for the formal assessment of the commitments for the second review and then send the paper to our Executive Board for consideration accordingly with that timeline several weeks later. So having an agreement in the next very few months would be quite important. Thank you.

QUESTIONER: (inaudible).

MR. BEUER: So we haven't finalized the dates quite yet. We're discussing them with the authorities. But in principle, it's sort of a semi-annual cycle. So six months from the last visit and six months from the last board meeting.

QUESTIONER: Can the second review be completed without a private creditor deal? And in your view, from preliminary data, have we met the kind of quantitative date targets for the December performance criteria and so on? And also, I think they also mentioned earlier in your staff report about the Central Bank's balance sheet. What is the preferred way of accounting? I think there's losses based losses after the debt restructuring on the domestic assets of the Central Bank, which was a result of the restructuring. So how do you view that and there was some call for recapitalization in the thing? Can you explain a little bit about that? Is the accounting that is currently done okay with the IMF?

QUESTIONER: (inaudible) from EconomyNext. My question is, how satisfied are you about the tax administration measures that have been taken up to now? Because especially some of the new structural benchmarks haven't been met. For example, large taxpayer unit, establishment of a large taxpayer unit, a new high net worth individuals unit. The other question is, despite IMF specifically advising the government not to go ahead with the Strategic Development Act providing concessions, tax concessions, it appeared that the government in last December, they have approved some tax concessions on a project. So I appreciate your comments on that as well.

MS. JAHAN: We'll take one more question. Yes, please.

QUESTIONER: (inaudible) is from EconomyNext. How concerned are you and government now targeting 7 percent inflation? Because early it was 5 percent. Now they seem to be working on 7 percent inflation. And then what's the specialty about going for north and east? What about the other region of the country? Because you went there. Any specific reason for that? Thank you.

MS. JAHAN: Okay, so if I may, I'll start with the last question, and then I'll give others to Peter to answer. It is very important for us to see all of Sri Lanka and understand all the challenges and potential that people in Sri Lanka face. When we come for our missions, we mostly interact with authorities, private sectors, CSOs here in Colombo. But at every opportunity that we do get, we try to get out of Colombo and see the other regions.

On our previous staff visit, we actually went to Gaul and saw some of the tea plantations, cinnamon tea packing industries there. And it also gave us a little bit of insight about how the workers that work on these packaging industries, about their lifestyles, the future for their children, and of course, that enlightens us about how the economy is functioning. And then we also had the fortunate opportunity to visit Dambulla and Sigiriya. So a different part of Sri Lanka, which also is quite tourism dependent. This time we went to the Eastern Province and the Northeastern Province. So we're trying to get different flavors of Sri Lanka.

This time we were quite lucky that when we went to Tkemali, we were able to see some of the new development projects that the region is thinking about. Our first day there, we heard about the floods, and so we understood about many challenges that Sri Lanka is facing, including from climate change. We also learned about the plans that the region has to help itself develop more. So, for example, we went to the Trincomalee Port Harbor, one of the deepest in the world, and we saw the potential that this harbor has and how it could help generate income for the region.

Then we went to Jaffna and again, we talked to the people there and we heard about the challenges they have been facing. And yet we also learned about the resilience of the Sri Lankan people. We had gone to a small and medium sized enterprise which was woman led. And we heard about her experience that how during the COVID crisis, she decided to try a new type of business activity. So now she does handicrafts with recycled paper and fabric, and she has found a niche in the global market. She now actually exports these handicrafts globally. So we've seen how either through industries or through these, for example, the port harbor or through even smaller enterprises, Sri Lanka can find its niche in the global market. And for us, that was quite heartening to see. Peter, I'll turn to you for the other two.

MR. BREUER: Yeah, so back from sort of the interesting life in Sri Lanka to the economic issues. So there was a follow up question on the debt. So really our strong expectation is that an agreement in principle would be reached with the commercial creditors by the time of the second review. As you may recall, we need to see a path towards restoring debt sustainability in Sri Lanka. For the IMF lending, that's a precondition. And so it's really important for that process to be completed soon.

With respect to the end December performance criteria and other commitments. So we will assess them at the time of the second review. That's when we conduct our formal assessment. Our purpose for being here now is to engage with the authorities on all of these reforms, identify any challenges and discuss how these challenges could be addressed.

But with respect to tax administration in particular, there was a question about with respect to these units, I mean, let me just say that tax administration is very important. So, meaning the ability of the country to collect the taxes that it needs in order to sustain its essential expenditures. And it is important for those who owe taxes to make these payments and to address any efforts of tax evasion, because it basically means any dollar or any rupee in taxes that is due but not paid means that everybody else has to pay more. And it's a significant reform in Sri Lanka to get back to the level of tax collection that Sri Lanka was at some time ago. And so it's important that everyone make their fair contribution to this effort. So our understanding is that these reforms with respect to the large taxpayer unit, the various institutional reforms inside that unit, are well underway in order to support the tax collection efforts in Sri Lanka.

On tax concession, so there is a commitment in the program to grant, to not grant any more tax concessions. Tax concessions are a missing component of tax revenues. So on the one hand you try to increase your tax collections, but on the other hand there are these tax concessions where people don't have to pay taxes. And so it's important not to continue with this practice. And we have been assured that that is in fact being followed. And although there have been proposals for tax concessions, including the one that I think you're referring to, our understanding is that that's not actually being approved and that is very important. I should also say that in the program there is also a commitment for enhanced transparency with respect to tax concessions and tax exemptions. So these are meant to be made public and will provide a better overview of the extent of these tax exemptions and also what they are worth in terms of economic value.

Then finally, on the Central Bank, we have the Central Bank Act that establishes the Central Bank's independence. It's important also for the Central Bank to be economically independent. So if it has negative equity as a result of the restructuring of its exposure to the government, then that could weaken it because it's then dependent on the government to ultimately be recapitalized. And that's why we consider it important that the Central Bank be adequately recapitalized as soon as its capital may become negative.

And that also pertains to its ability to pursue its inflation objective. So the inflation objective is 5 percent and there is a band around that, plus or minus 2 percent. So that means inflation can go to 7 percent. It's hard to hit precisely the target that's why there's a band around it. So 7 percent is at the edge of that target. Let me stop there.

QUESTIONER: Peter, I'm Prasad (phonetic) National Television Group Kahani. My question is that taxation became very wider topic here. But however, during your tour you met some SME people and the other areas of the moving of the Sri Lankan economy in other areas. So what are the main concerns of the other income generation areas, as well as now Sri Lanka is still maintaining some import restrictions, such as vehicle importation and all these things. So under these situations, what's your overall view regarding these areas?

QUESTIONER: May I ask three questions. One is, Peter, do you think that Sri Lanka would reach an agreement with China before the second review? That's number one. Number two, does the IMF have a particular division to deal with the recovery of stolen assets, to assist the country to recover stolen assets? And the third question was, well, we'll stop it at that. We'll just stop it at that.

QUESTIONER: Can I have a related question? Nisthar (phonetic) from Daily FT. Given the contraction of the economy over the last few years, my question is the capacity to pay this higher taxation, number one. And also there are some concerns about the new tax regime has sort of discouraged savings, private savings and investments. In that context, where do you see support for taxation as well as support for economic recovery?

MR. BREUER: Okay, thank you very much. So on, maybe the one on China. So Sri Lanka did reach an agreement in principle with the Export Import Bank of China and now this agreement in principle needs to be converted into an actual agreement. So that is already done. There is also the China Development Bank, which is considered a commercial creditor. And so their negotiations are still ongoing just as they are with the bondholders.

When you say the Sri Lanka debt restructuring, it's actually something like ten different processes, given all this very complicated creditor landscape. And so doing this sequentially makes sense because there's a limited capacity to how much you can do all at the same time. Of course, you know, there is engagement with all of these creditors. But now that the first two major blocks are close to being completed, the third one can be tackled.

So on taxation, you know, we have to remember, in 2019, tax revenue in Sri Lanka amounted to approximately 11 percent of GDP. This went down to 7 percent of GDP in 2022. Big drop. So already 11 percent was very low because expenditures are of the order of 20 percent of GDP. So by 2022, you had a gap of 13 percent of GDP. And that's when essentially the money ran out, when creditors said, we're not going to lend you that difference anymore, and that's how Sri Lanka went into this deep crisis. I mean, you can look at the causes for that. There were tax cuts, there was the lack of tourists from the Easter attacks, there was Covid. So there were many factors that played a role. And so the big challenge now for Sri Lanka is to get that number again closer to its expenditure levels and closer to a level where creditors are willing to say, okay, we will lend you the difference, we will help you cover the difference.

So now, in 2023, we're hoping that expenditure goes from 7 percent of GDP last year to 9 percent of GDP this year. And as I said at the beginning, there are good signs that in the last quarter of the year, revenue collection went up and that this objective will be met. Now, 9 percent is still not even half of the expenditure level. So it's important to continue with these reforms. There's the objective of reaching 12 percent in 2024 and then 14 percent beyond that in 2025.

So how is this being accomplished? Well, the authorities put in place significant reforms starting in 2022. So just around the time that staff level agreement at that time was reached, they put in place significant personal income tax, corporate income tax reforms, that take time, you know, to actually take effect. But this year, we are feeling the effects of that. Now, this year, the increase in VAT happened, and next year in 2025, the property tax is meant to happen, which is, you know, a progressive way of taxation. Meaning that those who can afford it more, those who have more expensive houses, will in fact, or property will have to pay a higher tax.

So I think the program is off to a good start. We see the effects of these reforms taking place. You know, we haven't even gone back to where Sri Lanka was in 2019. We have to remember that, that Sri Lanka did used to pay a lot more taxes. It's just a lot easier to cut them than to raise them and that's what's making this difficult. But I think Sri Lanka will get there and this is how it will be able to convince creditors that is again worthwhile to lend to Sri Lanka, and that way Sri Lanka will be able to extricate itself from the crisis.

Now, having said that, it's important to recognize the hardship that, you know, tax increases, and that the crisis in general, is imposing on the population, and it is important to recognize that. And as Sarwat explained, we saw some of this hardship ourselves in the various travels that we have done. And so the program does also provide for social protections to make sure that the vulnerable, who do not have the buffers to deal with the hardships, are taken care of and that those who can most afford it come to their help through the government. Yeah, let me stop there.

MS. JAHAN: I believe the question was on economy contraction and the decrease in revenues and implications of that. So first, let me start with indeed, Sri Lanka did have quite a few years of contraction in the economy. Yet most recently we have seen that in 2023, the third quarter posted a positive growth of 1.6 percent on a year on year basis. So after six consecutive quarters of contraction, we finally do see a positive growth.

Now, this positive growth has not filtered through all segments of the country, so there are many people who still do feel hardship. But we do see the program beginning to work and so we believe that if Sri Lanka can persevere a bit more, hold on to the reform agenda, then this recent growth that we are beginning to see can actually turn into a full recovery, which will then be felt by all of Sri Lankans. And this is what our hope is, that Sri Lanka will sustain the economic reforms and accelerate the momentum.

On revenues, I wanted to say, naturally, when the economy grows, you see a natural increase in revenues as well. Peter had talked about the various economic policies we had, the Sri Lankan authorities, had undertaken even before the program started, the policies that was implemented last year, and going forward, how we see these policies evolving. What I would also like to mention, and we had hinted upon this a little bit more, is that policies are important, but so is tax administration. And this Fund program places a lot of importance on making sure there is tax compliance, there is no loopholes, people do not receive tax exemptions, and for that we do have dedicated benchmarks in the program.

I'd also like to highlight the fact that good governance, especially in fiscal policy, is also needed. For example, Peter talked about the transparency portal. But I would also like to highlight governance in general is important to get Sri Lanka out of this crisis and into a full-fledged recovery. As you have seen, for this program we had a structural benchmark on the Governance Diagnostic Report which the authorities had published and met the structural benchmark in September. Now we look forward to the next action plan, the government's own action plan on governance.

And we also would like to highlight that in order for the full recovery to take place, good governance also has to ensure that there is an enabling environment for all of Sri Lankans to come together and ensure that people can hold others accountable, when we see that the policies that were meant for all Sri Lankans are not being implemented correctly. Peter, would you like to add?

MR. BREUER: Yeah, I think that last point that Sarwat made is a very important one. The environment in which reforms take place is very important to the success of the reforms. And so having an enabling environment in which governance and transparency reforms can take place is very important. If you see something, say something. Only if everyone works together to, you know, eliminate corruption and bribery will it actually work.

There was a question on the stolen assets. So in the Governance Diagnostic there was a recommendation, and in fact this has also been incorporated into the program with respect to the proceeds of crime or asset recovery so that there be a law that governs, you know, how to deal with that. That is a benchmark in the program and we are discussing the progress towards that with the authorities. Thank you.

MS. JAHAN: I'm very cognizant that we are coming up on our deadline. May I take just a few last questions.

QUESTIONER: What’s your predictions for the fourth quarter and has the government been able to digitize (inaudible) –

MS. JAHAN: Okay.

QUESTIONER: -- recommendation to extended support program as a condition?

MS. JAHAN: Okay. The gentleman in the back, yes?

QUESTIONER: Hi, from Sri Lankan News (inaudible). Do you have any intentions to integrate Governance Report recommendations and findings too and (inaudible) extend program as a condition?

MS. JAHAN: Sorry, I did not quite capture.

QUESTIONER: Governance report recommendations to integrate the extended Fund facility program and its conditions.

MS. JAHAN: Okay, I see two questions. I don't want to exclude anyone. Please go ahead.

QUESTINOER: I'm Pamodi (phonetic) from the NYT. In your last media engagement with us, you mentioned that the IMF had seen a key summary of the finance in terms with the deal with China. Have you all seen any more details? And if so, can you give us an insight into that? And also, will there be another Governance Diagnostic Assessment conducted on Sri Lanka this year as well?

MS. JAHAN: Okay.

QUESTIONER: Hello, I'm Madhusa (phonetic) from the Morning Newspaper. The government appears to only target direct and indirect taxes to collect revenue and there's not much visible progress in terms of addressing revenue leakages at high corruption places such as IRD and customs. What do you have to say about that?

And also the government still has the vehicle ban. IMF previously advised to do away with the ban, but what do you have to say about that as well? The government still having the vehicle import ban.

MS. JAHAN: Okay, so let me start with the growth question. You will have seen our Staff Report that came out in December, 2023. In that Staff Report for the entire year, we project a growth, well, a contraction, for 2023 of 3.6 percent. But I would like to highlight that, let's look forward. And indeed, we see positive recovery in the third quarter of 2023.

So in 2024, we're looking towards almost a 2 percent growth. This is our projections for now. Of course, when we get new data, we continuously update our forecast and these will be reflected in our Staff Report. Your second question was, sorry, on?

QUESTIONER: Any commitment by the government (inaudibles) for digitization and import restrictions.

MS. JAHAN: We have been in discussion with the authorities about how to improve revenue collection, and there's many avenues towards doing that. Digitalization is one of them, and this is something that is in discussion for now. Peter, I'll turn to you.

MR. BREUER: Yeah, thank you. So it is important to make progress towards digitization because that's an important way to sort of disconnect two parties who otherwise, you know, have scope to not transact in the way that they're meant to pay. And to do so, we do encourage progress with the digitization.

And that also pertains to this question on revenue leakages. It should be said that there is a commitment in the program that, you know, the various agencies introduce anticorruption plans for their specific agencies as well. So that will be important to make progress with as well.

On the question with respect to the Governance Diagnostic. So as explained when we designed the program, we came to the conclusion that governance issues are very important in Sri Lanka. Everybody we talked to highlight that.

So we realized that in order for the country to extricate itself from this very severe crisis, some measures needed to be taken to address governance. It's one of the core pillars of our program. So that's when we turned to our colleagues to conduct this Governance Diagnostic and the authorities were brave enough to commit to publish that Governance Diagnostic. It was published in September. And now we, of course, want to be sure that there's a follow up on that.

We have incorporated a number of high priority recommendations into the program. So first and foremost is that the authorities committed to the publication of an action plan for implementing these recommendations. So that's the first step. That's for in February. And then there are other measures.

For example, the process with which the Commissioners of the Anti-Corruption Commission would be appointed was also important to us and this is something we discussed with the authorities. And there's a commitment in the program with respect to that.

Other recommendations that were incorporated into the program is more transparency. So having a designated website with respect to public procurement contracts, with respect to publishing a list of firms receiving tax exemptions through the BUI or the SDP, as well as publishing a list of firms receiving tax exemptions on luxury vehicle imports, is something that the authorities committed to and is part of the program.

Other aspects that have been incorporated into the program are enacting a comprehensive asset recovery law. We just spoke about that for a minute, as well as cabinet approval and publication of a framework to strengthen governance in public banks. And then also finally to publish asset declarations for Senior Officials in line with the Ant-Corruption Act.

So these are all reforms that we considered very important that were recommended in the Governance Diagnostic that have now been incorporated into the program and the authorities are working on these now.

Now, the Governance Diagnostic, that's sort of a one-off product. It was quite, you know, involved to conduct and it has a very rich set of recommendations. It's a very rich document, but it does not sort of get repeated on an annual basis. It's a one-off product, but it will, of course, serve as a basis for reforms for quite some time to come.

So with respect to import restrictions. So, as you know, these have been loosened over time. There's some remaining and it's something that we will continue discussing with the authorities so as to balance, on the one hand, you know, the need for imports, for inputs into productions and services in the country to come in, so as to support economic growth. While at the same time being mindful of the need to rebuild reserves to withstand any future shocks.

As you remember, having essentially run out of reserves was another key aspect of this very severe crisis in 2022. So rebuilding these buffers is another important part of the program, I think, that addresses all the questions that were there.

MS. JAHAN: I would like to thank everyone for coming and joining us today during this press briefing. We look very much forward to seeing you next time when the mission is here. And if you have any follow up questions, please do send it to us.

Thank you.

MR. BREUER: Thank you so much for all your interest. Lovely interacting with you again. Thank you.

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