Transcript

Press Briefing on the Second Review of IMF-supported Program and Article IV Consultation Mission for Sri Lanka

March 21, 2024

PARTICIPANTS: 

PETER BREUER

Senior Mission Chief for Sri Lanka

KATSIARYNA SVIRYDZENKA

Deputy Mission Chief for Sri Lanka

SARWAT JAHAN

Resident Representative in Sri Lanka

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        MS. JAHAN:  Ladies and gentlemen, good afternoon.  Thank you for coming to the press briefing with the IMF.  I'm Sarwat Jahan, the Resident Representative based here in Colombo.  As you know, the IMF mission team has been in Sri Lanka since March 7.  The focus of this mission is to evaluate the progress of the reforms under the Second Review of the EFF supported program and also to conduct the Article IV consultation, which is a health check of the economy.

Joining me today are the IMF Senior Mission Chief for Sri Lanka, Mr. Peter Breuer, and the Deputy Mission Chief for Sri Lanka, Ms. Katsiaryna Svirydzenka.  May I kindly request you to use the microphone before you make your interventions and questions.  But first, let me turn it over to Peter for his opening remarks.

        MR. BREUER:  Thank you, Sarwat, and thank you all for being here and for your interest in our work.  It's always a pleasure for us to be here, so thanks so much.  As Sarwat mentioned, we are here in Colombo for the Second Review of the 4-year EFF supported program and the 2024 Article IV consultation.  We had productive discussions during these two weeks with a broad spectrum of stakeholders in the country, and in addition to meeting the authorities, we've been able to meet members of the civil society, think tanks, and a broad spectrum of stakeholders. 

Now, with respect to the outcome of the discussions we have had with the authorities, I'm pleased to share with you that we have reached staff-level agreement on the economic policies to conclude the second review of the 4-year EFF supported program. 

I would like to highlight that the staff-level agreement is subject to the approval of IMF management and the IMF Executive Board in the period ahead.  Completion of the review by the IMF Executive Board requires one, the implementation by the authorities of prior actions and two, the completion of financing assurances, confirming multilateral partners financing contributions, and assessing adequate progress with the debt restructuring.  Upon completion of the Executive Board review, Sri Lanka would have access to about $330 million, bringing the total IMF financial support under the program under the arrangement to approximately $1 billion after three disbursements. 

So, now let me turn to the progress the authorities have made with the reform agenda led to staff-level agreement.  The authorities are making good progress in implementing the ambitious reform agenda under the EFF with commendable outcomes, including rapid disinflation, robust reserve accumulation, and initial signs of economic growth while preserving the stability of the financial system.  Public finances have strengthened following substantial fiscal reforms. Program performance overall was strong with all quantitative performance criteria and indicative targets for end-December 2023 met, except for the indicative target on social spending.  Most structural benchmarks due before the end of February were either met or implemented with delay.  Reforms in some areas are still ongoing. 

The economic situation is gradually improving.  Growth turned positive after six consecutive quarters of contraction, registering 1.6 percent and 4.5 percent year-on-year in the third and fourth quarter of 2023, respectively. And moreover, high frequency economic indicators point to a continued pickup in manufacturing, construction, and services.  Inflation has come down from a peak of 70 percent in September 2022 to 5.9 percent in February of 2024, and gross official reserves increased to $4.5 billion at end February, with sizable foreign exchange purchases by the central bank. 

Sustaining the reform momentum going forward is critical, is absolutely critical to put the economy on a path towards lasting recovery and stable and inclusive economic growth.  We welcome the authority's commitment to fiscal reforms. Continued progress towards the introduction of the property tax is critical, together with revenue measures to meet the revenue mobilization goals in 2025 and beyond.  Revenue administration and anticorruption efforts to boost tax collections are also key.  Maintaining cost recovery in fuel and electricity pricing will help minimize fiscal risks arising from state-owned enterprises. 

Now, while inflation has decelerated faster than expected, continued monitoring is warranted to help anchor inflationary pressures and support macroeconomic stability.  Against ongoing external uncertainty, it remains important to continue to rebuild external buffers through strong reserves accumulation. 

Sri Lanka's Agreements in Principle with the Official Creditor Committee and Export-Import Bank of China on debt treatments consistent with program parameters were important milestones, putting Sri Lanka's debt on the path towards sustainability.  The critical next steps are to finalize the agreements with the Official Creditors and reach Agreements in Principle with the main external private creditors in line with program parameters in a timely manner.  This should help restore Sri Lanka's debt sustainability over the medium term. 

The authorities recently published an action plan to implement the key recommendations of the Governance Diagnostic Report and this is a very welcome step.  Sustained efforts to implement these reforms will be essential for addressing corruption risks, rebuilding economic confidence, and making growth more robust and inclusive. 

We also took the opportunity of being here to explore Sri Lanka outside of Colombo and get a sense of the pulse of the nation.  During our visit, the team went to Nuwara Eliya and met with tea plantation workers where we learned firsthand about some of the challenges that Sri Lanka's most vulnerable face.  Continued efforts to improve targeting, adequacy, and coverage of social safety nets, particularly Aswesuma, remain critical to protect the poor and vulnerable. 

I would like to thank the authorities and all our counterparts for the very warm welcome we have received here in Sri Lanka and the excellent collaboration.  With this, let me hand it back to Sarwat.

        MS. JAHAN:  Thank you, Peter.  I will now open the floor to questions.  Please, before you ask your questions, if I can request that you wait for the microphone so we can hear you.  And this is also being recorded.  Is there anyone?  Yes, please.  Can we get the microphone?  If you can start with introducing yourself, please, and your affiliation.

        QUESTIONER:  Good afternoon.  Zulfick Farzan from News First.  With respect to your statement that you made with regard to the Agreements in Principle, have the international sovereign bond holders conveyed anything to the IMF with regard to the delay in reaching an agreement and the signing of MOUs with the bilateral creditors?

        MS. JAHAN:  Let me take a couple of more.  Yes, please.

        QUESTIONER:  Shall I ask one?  Due to conditions of the IMF, the tax burden and the pressure of the prices of goods have increased greatly and the vast majority of people have suffered, what is your response to Sri Lankan government regarding options to reduce this pressure?

        MS. JAHAN:  And please.

        QUESTIONER:  Yeah, Nisthar from the Daily FT.  Can you clarify multilateral partners committed financing contribution?  What does it mean, this is apart from the assurances?

        MS. JAHAN:  Sorry, I didn't get your affiliation.

   QUESTIONER:  Is this something addition to the financial assurances given?

   MS. JAHAN:  Okay.

    QUESTIONER:  I'm Shirajiv Sirimane, business editor from Daily News.  The amount that is requested by Sri Lanka or was it coming, like, Egypt gets a separate amount, Pakistan gets a separate amount.  How does this loan amount requested -- I mean quantified?

        MS. JAHAN:  Great, thank you for the questions.  I'll hand over to Peter for the debt restructuring questions.  Katya can then take the one on the financing amount from the IMF.

        MR. BREUER Thank you for these.  So, the question on the debt restructuring and maybe also on the multilateral financing partner, so, basically for us, we conduct these financing assurances that give us assurance that all the relevant stakeholders are doing what is needed to ensure that the program of Sri Lanka is financed.  And so, in the case of the multilateral institutions, that means we assure ourselves that the financing that they have indicated they would make available to Sri Lanka will be available in the period ahead.  So we seek these assurances for the next 12 months and seek a degree of comfort for the period of the program beyond that.  So, it's a routine exercise and we repeat this at each review. 

     So with respect to the creditors, I would not necessarily agree that there is a delay in the agreements with the official creditors.  So agreement in principle was reached between Sri Lanka and the Official Creditors, both the Official Creditor Committee and also the China Ex-Im Bank late last year.  It is true that it is now important that these Agreements in Principle need to be converted into an actual agreement, or, in the case of the OCC, into a memorandum of understanding. 

     But it is fairly common for that process to take some time.  And so, accordingly, we have not received a question in that regard.  But we would urge that this process move along expeditiously, because it seals what has been agreed and is therefore a very important part of restoring debt sustainability. 

     With respect to the way I understood the question is that there is a significant tax burden, and sort of what are the options to reduce the pressure?  We understand that Sri Lanka is in a significant crisis.  Real incomes have declined substantially.  In dollar terms, Sri Lanka lost about 1/6th of its economic activity.  GDP went down 15 percent in dollar terms in 2023, relative to ‘22.  So certainly the people of Sri Lanka feel that hardship every day.  Now, a key reason for why this happened is because the government ran out of money and could not access any financing, because it didn't really have a strong income source of its own, and so, this is how the crisis started to happen. 

     Sri Lanka's general revenue in 2022 was in the order of 8 percent.  It used to have a revenue of up to 20 percent of GDP in the 1980s.  So it is a country that used to actually collect a lot more revenue, almost three times as much as it did in 2022.  And also, by international comparison, in the three years between 2019 and 2022, Sri Lanka's general revenue averaged something like 9 percent, maybe 9.5 percent of GDP, compared to other emerging market countries, in the order of 26 percent.  So this tax burden, this population has experienced this tax burden before, and it is needed in order to fund the essential services that the government is providing.  It is providing common goods for everybody.  And if everybody wants to continue enjoying these common goods, then everybody has to make commensurate contributions, and that would address one of the root causes of the crisis.  Maybe Katya?

          MS. SVIRDZENKA:  So, on the question of what determines the amount of the loan, for all countries that we engage with, the size of IMF lending is a function of many factors.  One is the size of the external shock that the country is experiencing.  The other is the resulting BOP need, the need for financing that is required for this particular case, given the shock the country is experiencing, then it is a function of how it is restored.  So the adjustment in domestic policies, and then the financing envelope that's available from the other development partners. 

    So, in the particular case of Sri Lanka, the way that the size of IMF lending was determined, first we said, okay, we need to restore reserves from virtually nonexistent to reserve adequacy.  And then the question was, how will we get there?  One part of that would be the debt relief provided for debt restructuring.  The other one was the adjustment in domestic policies that contributed to the drain in domestic reserves, and a key component of that is fiscal consolidation.  And the third component was how much the donor support was available from other development partners. 

     As a result of this joint calculation, it was determined that Sri Lanka would avail of $3 billion from the IMF Lending Facilities, which would be disbursed over 4-years in equal disbursements about twice a year.

          MS. JAHAN:  I would just like to add to Peter's answer when you had asked about the hardships that the people are going through.  Indeed, Peter outlined the reforms, the impact, and how we see Sri Lanka coming out of the crisis, and also the importance of sticking to the reform agenda.  I'd also like to highlight that we're very aware that the crisis has hit the poor and the vulnerable the most.  And as a result, in the program, we also have a spending floor on social safety nets.  That means that the government has to spend a minimum amount to protect the poor and the vulnerable from the economic crisis, and again, to help them recover so they can find their feet again.

        MR. BREUER: Can I just add a point, also, sort of on the size of the program?  So I think Katsiaryna very nicely described sort of how the need is derived.  It's important to recognize that there's also a constraint, which is, of course, that how much the IMF can actually make available.  And that is based on every country's share in the International Monetary Fund, and that puts a limit on how much can be lent.  Thank you.

        MS. JAHAN:  The next set of questions, please.  Yes, if you can introduce yourself?

        QUESTIONER:  Asante Sriraman from Bloomberg News.  You have said there are some prior actions, can you explain to us some of the prior actions?  And also what's your view of the increasing reliance of swaps by the Central Bank, the entering of SOP contracts by the Central Bank to build reserves?  How do you view that from the IMF point of view?

        MS. JAHAN:  What's your question?  The Central Bank engaging in?

        QUESTIONER:  Swaps with domestic market participants, is that a good thing or is there a problem with that?

        MS. JAHAN:  Sorry.  The Central Bank is building up reserves, yes.  And for that --

        QUESTIONER:  Doing it through swaps with domestic market participants, is that a good thing or not?

        MS. JAHAN:  Got it.  Great, thank you.

        QUESTIONER:  Shihar Aneez from Economy Next.  Given Sri Lanka is going to election cycle, by any chance, the authorities asked to be relaxed or kind of ask any excuses during the next review, given that it's going for an election cycle from June onwards?  Thanks.

        MS. JAHAN:  Yes, there.

        QUESTIONER:  Yeah, I'm Prasad (phonetic) from Rupal (phonetic) National Television.  Now, you mentioned about the staff-level agreement.  Can you give any kind of timeline of providing the next $337 million tranche?  And now, in the previous question, he mentioned about the election coming up, election process.  You held discussions with many political parties during this time, so what's their indication about the maintaining this facility and do they propose any changes?  So what's their reaction to this process?

        MS. JAHAN:  Great.  Thank you for those three questions.  Peter, if you'd like to start on the prior action elections.

        MR. BREUER Okay.  Thank you, for these questions.  So, let's put these together with respect to the elections.  So, yes, we heard many different proposals.  For us, what is absolutely key is that the program objectives are achieved because with those, Sri Lanka has a chance of emerging from the crisis.  The path is a knife edged path.  We have to remember that.  So, yes, we acknowledge in our press report the green shoots that we see for the economy, and that's the beginning of a virtuous cycle and we have to keep it there.  It is knife edge and could easily go back to a vicious cycle, and that's what we want to prevent.  So we are willing to listen to alternative suggestions of how the program objectives can be reached, and these must be realistic and achievable within the time frame of the program. 

Let me just assure you that the program is the result of robust discussions that we had in the summer of 2022, and since then, at the periodic reviews where we look at progress under the program.  So, I would argue it is quite well thought out.  But of course, we are willing to listen to alternative views.  The important part is that the hard-won gains of the Sri Lankan people over the last two years are not unraveled. 

Now with respect to the prior action.  So, yeah, some reforms are still ongoing.  So we have laid out in our last staff report from the first review some of the reforms.  So the public financial management bill is something that we have been engaged with, with the authorities.  So this is, for example, something that we are paying close attention to.  And then, maybe just on the timeline going forward, so we have semiannual reviews.  Usually we come here in the northern hemisphere, spring and fall.  It, of course, then takes some time to complete the work back in Washington, to actually bring the program to the Executive Board for disbursement.  And then we come here in the off quarters, meaning around the summer and the winter for staff visits.  So that's, roughly speaking, our motives, but we of course adjust according to developments. 

        MS. SVIRDZENKA:  So, on the swaps, rebuilding reserves is a very important component of the IMF supported programs. You can rebuild reserves in several ways. One, is what we call organic purchases by the central bank in the foreign exchange market. The other one is rebuilding reserves for engaging with swaps.  This can either be swaps with domestic banks, but also swaps with other central banks.  The letter is a very important part of both global and regional financial safety nets.

        MS. JAHAN:  I'm conscious of the time.  Can we take some of the last round questions?

        QUESTIONER:  I'm a journalist from the Island Newspaper.  Mr. Breuer, the controversy now is around Central Bank's independence and its phenomenal salary hikes.  Do you think this could have an adverse impact on the credibility of the Central Bank of Sri Lanka?  Thank you.

        MS. JAHAN:  Are there other questions?  If we can take --

        QUESTIONER:  Today, what is the expectation about the exchange rate, is it overvalued or undervalued?

        MS. JAHAN:  I’m sorry, the exchange rate? 

        QUESTIONER:  Yes, the expectation.  What is it, overvalued or undervalued?

        MS. JAHAN:  Okay, thank you.  One second, please.  Yes, thank you.

        QUESTIONER:  From Daily News.  How were the other countries responded to the suggestions made by IMF?  Has Pakistan been better than Sri Lanka or the African countries better than in Sri Lanka when it comes to implementation?

        MS. JAHAN:  We can take maybe one more question, if there is any.  Yes, please.  Thank you. 

        QUESTIONER:  Udita Jayasinghe from Reuters.  Our local officials have said that they are expecting the IMF Executive Board to review things and give a decision by June.  Is that also a plausible timeline as well from your evaluation?  Thank you.

        MS. JAHAN:  Great.  Let me take the question on implementation and then I'll turn to Peter for the CBA and the exchange rate, and Katya, perhaps on the timeline.  Okay.  So, on implementation, so far we have seen commitment towards the reform program.  Sri Lanka passed the first review and as Peter has announced today, Sri Lanka has reached the staff-level agreement.  Of course, it is contingent on the measures that he has outlined.  But so far, we see that Sri Lanka has made good progress. 

Comparison to other countries, we feel that perhaps it is not best to compare Sri Lanka with other countries.  Sri Lanka is in its own unique situation.  The important part to remember is Sri Lanka has achieved hard won gains, right?  There has been very important reforms that Sri Lanka has undertaken and it is very important to keep the momentum going so that Sri Lanka can indeed reach debt sustainability and it can bring growth to a firmer footing on recovery.

        MR. BREUER: Thank you.  So, on the question with respect to Central Bank independence, yes, that's an absolutely key pillar under the program.  The Central Bank Act has long been in the making and when that was achieved, it achieved a key objective.  Of the program, the objective, of course, being that the Central Bank can set monetary policy according to the needs in order to keep inflation down in line with its objectives.  Before this was achieved, there was a significant degree of monetary financing in Sri Lanka, which was one of the key contributors to the very high inflation Sri Lanka experienced. 

So we don't have much to say with respect to the salary hike.  What's important is that there be a high degree of transparency on the part of the Central Bank to explain how it is benchmarking its decisions.  And the key is to preserve Central Bank independence.

With respect to the timeline going forward, so that depends, as I said, to complete the review, there are these two key things that must happen.  One, is the completion of the prior action and secondly, the completion of the financing assurances.  So, we look to see swift progress with the outstanding items that I discussed, in particular, reaching agreement with the commercial creditors, the international bondholders, and also China Development Bank, so as to cementing the path to debt sustainability.

On the exchange rate, we don't take a view which way it is going to go.  We do conduct something as part of the Article IV consultation that is called the external sector balance assessment.  That tries to look at, in economic terms, how is the situation of the Sri Lankan economy vis a vis its trading partners?  And so implicit in that is some thinking about the real exchange rate.  So taking into account not only the nominal exchange rate, but also the difference in relative prices and the various pressures that exist.  We last conducted this exercise during the previous Article IV consultation two years ago.  At that time it showed that the exchange rate in Sri Lanka in real terms was overvalued and that it still needed to depreciate in order to reach equilibrium.  And there are still import restrictions here in Sri Lanka.  So when these are phased out over time, then we will finally be able to observe the true sort of equilibrium level of the exchange rate in line with reaching this external equilibrium.  So yeah, that's all I have to say on that.  Thank you.

       MS. JAHAN:  Okay, I see perhaps one last question.

        QUESTIONER:  From Daily FT, just a follow up to the early answer about multilateral committed financing.  Can we know how much was expected in March 2023 and have the multilateral partners continued to finance it?  And what kind of expectations are you looking forward for the next 12 months?

        MS. JAHAN:  Yeah, I think that was -- okay, one more question and then I'll -- Okay, I think there are no questions.  That was the last one.  Peter, I'll hand it to you.

        MR. BREUER:  Yeah.  Thank you, very much.  So those numbers are published in our staff report.  We have a table that describes what the assumptions are with respect to -- there's basically two forms of finance that come from multilateral and also bilateral partners, which is program, what we call sort of program finance, which is budget support, and there's project finance for specific projects.  So those numbers are in the staff report. 

This support by multilateral and bilateral partners is very important for the financing of Sri Lanka's program, and they have stepped up to provide that financing.  We did see a bit of a shortfall in project financing last year from a number of traditional providers of this project financing.  But essentially, we understand that this is related to the sovereign debt restructuring that is going on to the sovereign default.  And that is just another example of how important it is to complete the debt restructuring and for there to be a path back to debt sustainability, because it then allows investors, Official Creditors, and hopefully private investors to come back to Sri Lanka and contribute to the nascent growth here that would allow the beginnings of this virtuous circle to grow into a full round.  Thank you.

        MS. JAHAN:  Thank you, ladies and gentlemen.  We greatly enjoyed discussing the IMF missions with you and we look forward to future engagement with you.  If you have any questions, please feel free to reach out to us.  But thank you once again for spending the afternoon with us.