Transcript

Press Briefing on Sri Lanka's 2024 Article IV Consultation and the Second Review under the Extended Fund Facility

June 14, 2024

PARTICIPANTS:

Moderator:

HUONG LAN “PINKY” VU

Communications Officer

Speakers:

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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T R A N S C R I P T

MS. VU: Good morning, everyone. I think we can start now. Good morning to those who are joining us from Sri Lanka and Asia. And good afternoon, good evening to those who are connecting from other parts of the world. Thank you very much for joining the IMF's press briefing on Sri Lanka's 2024 Article IV Consultation and the Second Review under the Extended Fund Facility, or the EFF, program.

I'm Huong Lan “Pinky” Vu from the Communications Department at the IMF. And joining me today are three speakers from the Asia and Pacific Department at the IMF.

· Peter Breuer, Senior Mission Chief for Sri Lanka

· Katsiaryna Svirydzenka, Deputy Mission Chief for Sri Lanka, and

· Sarwat Jahan, Resident Representative in Sri Lanka.

To kick off the briefing today, I would like to invite Peter to deliver some opening remarks, and then we'll open the floor for your questions. Peter, over to you, please.

MR. BREUER: Thank you very much, Pinky, and good morning. Thank you very much for being here and for your interest in the IMF program.

Yesterday, the IMF Executive Board completed the 2024 Article IV Consultation and Second Review under the 48-month Extended Fund Facility with Sri Lanka, which is providing the country with immediate access to about $336 million to support its economic policies and reforms. This brings the total IMF financial support dispersed so far to about $1 billion. The program continues to support Sri Lanka's efforts to restore macroeconomic stability and debt sustainability mitigate the economic impact on the poor and vulnerable, rebuild external buffers, safeguard financial sector stability and strengthen governance and its growth potential.

The IMF Executive Board's approval recognizes the strong program performance. All quantitative targets were met except for the marginal shortfall of the indicative target on social spending. Most structural benchmarks were either met or implemented with delay.

Reforms and policy adjustments are bearing fruit. The economy is starting to recover, inflation remains low, revenue collection is improving, and reserves continue to accumulate. Real GDP expanded by 3 percent year-on-year in the second half of 2023. May 2024, inflation was 0.9 percent, and gross international reserves increased to $5.5 billion dollars by the end of April of this year. The primary balance improved to a surplus, with tax revenue increasing to 9.8 percent of GDP in 2023.

Despite these positive developments, the economy is still vulnerable and the path to debt sustainability remains knife edged. Important vulnerabilities associated with the ongoing debt restructuring, revenue mobilization, reserve accumulation and banks’ ability to support the economic recovery continue to cloud the outlook. The key to transitioning from stabilization to a full economic recovery is sustaining the reform momentum amidst strong ownership by the authorities and the Sri Lankan people more broadly. We encourage the authorities to continue to build on these hard-won gains and remain steadfast with their reform commitments.

To restore fiscal sustainability, sustaining revenue mobilization efforts, promptly finalizing the debt restructuring in line with program targets and protecting social and capital spending remained critical. Advancing public financial management will help enhance fiscal discipline and strengthening the debt management framework is also needed.

Monetary policy should continue to prioritize price stability, supported by a sustained commitment to refrain from monetary financing and safeguard central bank independence. Continued exchange rate flexibility and gradually phasing out the balance of payments measures remain critical to rebuilding external buffers and to facilitate external rebalancing. Restoring bank capital adequacy and strengthening governance and oversight of state-owned banks are top priorities to revive credit growth and support the economic recovery.

Sri Lanka has made substantive progress towards advancing debt restructuring to restore debt sustainability. A swift finalization of the Memorandum of Understanding with the Official Creditor Committee and final agreements with the Export Import Bank of China remain a priority. It is also important to complete the restructuring with external private creditors consistent with program targets. IMF staff will continue to assist the authorities with creditor coordination in line with the IMF's policies.

We encourage the authorities to press ahead with structural reforms to unlock Sri Lanka's long-term growth potential. Steadfast implementation of the governance reforms would support the authorities broader reform agenda. Key priorities include first, further trade liberalization to promote export and foreign direct investment. Second, labor reforms to upgrade skills and increase female labor force participation. And third, state-owned enterprise reforms to improve efficiency and transparency and to contain fiscal risks, and promote a level playing field for the private sector.

We would like to thank the authorities for their commitment and look forward to our continued close engagement with the authorities as well as other stakeholders in Sri Lanka. Thank you very much.

MS. VU: Thank you, Peter. And now we'll take questions from the floor. If you would like to ask a question, please raise your virtual hand and wait for me to call on you. When it's your turn to speak, please turn on your camera and your microphone. Kindly introduce yourself and your news organization. And when you're not speaking, please mute your microphone. Thank you.

I see Zulfick Farzan. Zulfick, please.

QUESTIONER: Thank you. Thank you, Peter, for your presentation. I have two questions. Question one is the IMF Executive Board has called for a swift finalization of the MOUs with Official Creditors and the agreements of the EXIM Bank of China. Now, have the creditors given any reason for the delay in reaching these agreements? And secondly, the directors have underscored that important vulnerabilities and uncertainties remain, especially with the upcoming elections. Now, has the IMF raised any concerns about these, or is there any concern that any future government may want to revisit or amend the existing agreement with the IMF? Thank you.

MS. VU: Thank you. I think I take one more question.

QUESTIONER: Yes, yes, I am Prasad from Rupavahini Television. I would like to ask that you mentioned about reforms mainly in three sectors in your last comment. So what's your overall view about the ongoing reforms process? And especially, you mentioned about the reforms regarding the state-owned enterprises, which is much challenging task for any government to continue. So what's the IMF's current view regarding this sector, as well as the labor reforms and other areas?

MS. VU: Thank you, Prasad. Peter, over to you, please.

MR. BREUER: Thanks so much. So I'll respond to the first set of questions, and Katya can respond to the second one, and Sarwat too.

So with respect to the negotiation with the Official Creditors, first, let me just state why this is important, and that is the debt of Sri Lanka is unsustainable. It is important to restore debt sustainability. There are different components to that. One is, of course, the fiscal consolidation and another one is the debt restructuring. So the debt restructuring, there are many components to it, including with the Official Creditors and that is the question that Zulfick had here.

We have been following the process very closely and have assessed that there is sufficient progress for the debt restructuring to move forward and to restore debt sustainability. So, in fact, both agreements are very close. There is agreement on the substance of the financial and legal terms with both types of Official Creditors, and it is procedural issues that need to be resolved, and we anticipate that this will happen very soon.

On the question with respect to the elections, first, it's important to note that it is, of course, up to the people of Sri Lanka to decide on the outcome in a democratic process. But let me reiterate from our perspective that achieving the program's objectives is the key priority to give Sri Lanka a chance to emerge from one of the worst crises in its history. So there may be different proposals how to achieve that, and we are willing to listen to different views on how these program objectives can be reached. These need to be realistic and achievable within the timeframe of the program.

Sri Lanka has made good progress in terms of getting the recovery going, but the country really isn't out of the woods yet, and it will be important to safeguard the hard-won gains. So a key priority in the time ahead is to persevere with the reforms that will enable a stable and inclusive economic growth and avoid slipping into another crisis.

Katya, would you like to get started with the other set of questions?

MS. SVIRYDZENKA: So the other question was on the status of the SOE reform. Just to summarize why we got there. SOEs have been a burden on the public finances, limiting the fiscal space that could be used, for example, for strengthening and increasing the size of social safety net in Sri Lanka. So it is important to ensure going forward that the state-owned enterprises are financially viable and managed in an efficient and transparent manner to avoid any additional burdens on public finances.

There are many different elements of the SOE reform. What we are supporting under the IMF program is cost recovery for fuel and electricity. This is important to make sure that the SOEs are financially viable going forward. There are other aspects of the SOE reform that are done by the government with assistance from the World Bank and the Asian Development Bank. These include improvement in the governance and transparency of the SOEs and making sure that they are running in an efficient way so they can deliver public services in a cost-effective manner. Thank you.

MS. VU: Thank you, Peter and Katya. Next, I have Shihar Aneez from Economy Next. Shihar, do you want to come in?

QUESTIONER: Yes, thank you. I have two questions, Peter. One is about you released the Governance Diagnostic Report on Sri Lanka, the first in Asia. How do you see the progress? Because as per last, one of the last years prescriptions, you all expected Sri Lanka to come up with the relevant law to stolen asset recovery by April this year. Now it's already June. Do you see a delay there and how concerned are you on the implementation of it? That's one thing. Second one, do you see the equal comparability in the Chinese bilateral loans? Because IMF has been so concerned about the Chinese loan when it comes to the bilateral loan restructuring agreement. So how do you see that? Thank you.

MS. VU: Thank you, Shihar. I would like to invite Indika Sakalasooriya. Indika, please go ahead.

QUESTIONER: Hello. Hi, can you hear me?

MS. VU: Yeah, there's a bit of echo but yes, we can hear you.

QUESTIONER: Yeah. Thank you for the opportunity. So my question goes to -- question is about the new tax policy measures that is expected to be subjected to parliament by end of this month. So don't you think that this would be sort of counterproductive because regarding economy is lagging and, you know, slapping more taxes on people would be sort of counterproductive for the growth of the country? That is my question. Thanks.

MS. VU: Thank you, Indika. Peter, would you like to respond?

MR. BREUER: Yes. So I'll take the one on the debt and on the tax policy, and then maybe Sarwat can come in on the Governance Diagnostic Report.

So -- I think we're picking up some background. So with respect to comparability of debt treatments, this is a concept that is important for Official Creditors. They are concerned whether the debt relief that they offer is in line with that offered by other creditors. It is not something that is relevant for the IMF, at least not directly. It is indirectly in the sense that we need all creditors to participate in the debt restructuring in order to restore debt sustainability. But from the IMF's perspective, what matters is whether the debt restructuring targets are being met. And so we have been provided with information with respect to the debt relief that is being offered and have looked at that. And similarly, the official creditor committee secretariat has looked at the same information from the comparability of treatment perspective.

So it's really a question to the creditors with respect to the comparability. And then with respect to the question on the tax measures. So, yes, in some economies, when the economy is in a downturn, then you think about stimulating the economy, and so you would adjust fiscal policy accordingly. In Sri Lanka, however, the cause for the crisis is the collapse in fiscal revenue that led to the fact that Sri Lanka was not able to service its debt anymore and it went into default. So in Sri Lanka, one of the key causes of the crisis is the lack of revenue, and that is, you know, being addressed with the program.

In fact, I'd like to direct your attention to two charts that we have in the Staff Report. On page 13, they show how government revenue to GDP has evolved over time in Sri Lanka. And you can see that that has gone from the region of 20 percent of GDP in the 1980s to around 8 percent in 2022. So it used to be three times as much as it was in 2022. And in order to sustain a government that delivers the essential services that a society wants, it is important to have the revenue to do that. And in the chart, you can see how the program is seeking to rebuild this revenue collection.

So significant progress has been made in ‘23 as well as in ‘24. And it is sort of one more push to get revenues to the region of 15 percent of GDP in 2025. Thereafter, you can see it's only a small adjustment. And there is a chart also that shows where Sri Lanka is in comparison to other middle-income countries. And you can see that, on average, between 2019 and ‘22, Sri Lanka had general government revenues on average of about 9.3 percent, and that compares to an average of these other countries of 26 percent of GDP. So again, almost three times as much. So this is really what, what this program is seeking to address.

Over to Sarwat. Thank you.

MS. JAHAN: Thank you, Peter. On the Governance Diagnostic Report, indeed, the report did come out in September, and the report did have time bound recommendations on improving governance and addressing vulnerabilities in that sector. Since we last met after the First Review, there has been some benchmarks that on the governance area.

Let me take you through a few of those structural benchmarks. One of them was publishing a government action plan for implementing the recommendation on the Governance Diagnostic Report. This publication was actually published in May 2024, and the structural benchmark was met. There was another important governance structural benchmark that was on publishing on a semi-annual basis on a designated website that would have all public procurement contracts above $1 million, along with comprehensive information on the award winners. There would also be a list of firms receiving tax exemptions, either through the board of investment or the SDP, and there would be a list of firms receiving tax exemptions on luxury vehicles.

These two structural benchmarks were met. As the question had asked, there was also a structural benchmark on the comprehensive asset recovery law, which in our program documents had a target date of end April. We understand that the authorities are working on this recovery law and the process has not been completed. Therefore, as you will see in the Staff Report that has just been published, we have reprogrammed this structural benchmark so that it is indeed met and the new target date is end November 2024.

MS. VU: Thank you, Peter and Sarwat. I see a couple of more hands. Asantha, do you want to come in?

QUESTIONER: Yeah. Thank you. There is this new taxes that are supposed to go to the local government bodies from housing and so on. Is there any plans to have a kind of law to make sure that this money is spent properly and that it's prioritized? Because what we see is many of these bodies which are cash rich, some of them are cash rich, and they kind of go and build buildings and shopping complexes and new shops to various people who are politically friendly. So how do you ensure that this money actually goes to public services, and they are not misspent as it's happening now?

MS. VU: Thank you. Madhusha, do you want to come in?

QUESTIONER: Hi. I have two questions. First one is, if Sri Lanka's path to debt sustainability remains knife edged, can a newly elected government come and renegotiate certain reforms, such as reducing taxes? If so, how will such measures can impact the recovery once again? Second question is, you said Sri Lanka has been performing well under the IMF program, but we see, there are very few, if any, measures to address high level corruption, especially at IRD and customs. What is the IMF stance on this? And why isn't alleviating corruption being pushed well enough under the reforms?

MS. VU: Thank you, Madhusha. I will take one more question and then I come to Peter and the team. Sampath, please go ahead.

QUESTIONER: Yes, I am Sampath from BBC the Sinhala Service (phonetic). My question is, Sri Lanka is going to hold presidential election in next few months. How does it affect this loan program? There is also talk that presidential election should be postponed. So what is the IMF opinion about it?

MS. VU: Thank you. Peter, over to you, please.

MR. BREUER: Thank you very much. So let me start with the election and the sort of scope to reduce taxes. We, of course, fully respect the democratic process for elections to take place in any country and we adapt to that process. So, you know, this may affect a little bit the timing of our missions that we conduct in order to discuss compliance with the program and reforms going forward. So, you know, we -- the elections have, of course, not been called yet. So we will await that and then discuss with the authorities how we can adapt our schedule to that of the elections.

Now on that question, whether there is scope to adjust the program and reduce taxes. So I just pointed you to these two charts that tell the story of how the reduction in government revenues had contributed to this very severe crisis in Sri Lanka. And so rebuilding these revenues is an important objective of the program in order to allow Sri Lanka to emerge from the crisis. And, of course, the idea here is to bring revenue closer to the expenditures that the government is facing to reduce the gap between expenditure and revenue, and that will help to make the debt sustainable again and for Sri Lanka to be able to finance itself at interest rates that it can afford and that are sustainable.

So, I mean, more broadly speaking, with respect to, you know, proposals, as I said before, we're willing to listen to different views of how the program objectives can be reached, and these need to be realistic and achievable within the timeframe of the program. So that's very important.

The first question, and Sarwat will speak about the one on corruption. The first question, I think, it was sort of, if I get it right, it's sort of a question on public financial management. And there maybe I can point to the public financial management law that has now been sent to parliament, which will help to strengthen the fiscal framework and enhance fiscal responsibility. So that should help, you know, to ensure that sort of funds are being spent as intended. But maybe Sarwat can also speak a little bit there about the social and corruption aspects of that question.

MS. JAHAN: Thank you, Peter. I believe there was a question on how to address anti-corruption measures and improve governance, especially on tax collection. For there I would also like to point to you the newly published Staff Report. As you will see, our Staff Report talks a lot about the new targets for the government, including new structural benchmarks on improving governance. One of our new structural benchmarks is actually on addressing governance vulnerabilities and anti-corruption in tax collecting agencies. So our new structural benchmark there is to develop in each revenue department, which means that IRD, customs and excise, an implementation plan to launch a program of anti-corruption measures to strengthen the code of conduct, international affairs department, risk management and automation. So we are looking into a holistic approach. The structural benchmark is actually due by the end of August, and we look forward to seeing its implementation.

MS. VU: Thank you, Peter and Sarwat. I think Prasad has a follow up question. Prasad, do you want to come in? And this is going to be the last question because we are running out of time.

QUESTIONER: Thank you. One major component in this IMF program is regard taking care of the vulnerable communities. So although IMF always get accused, but not concerning about the people. It's one major component I see. So what's the latest situation regarding the Second Review and in the future reviews? What are the key components that you are taking care about this vulnerable sector in Sri Lanka and especially effect under these economic crises as well as the tough reform programs?

MS. VU: Thank you, Prasad. Peter.

MR. BREUER: Yeah, maybe I can just start and Sarwat can come in on this as well. This is an important part of the program because in a crisis, the poor and the vulnerable, they have the least buffers and they are affected the most by the crisis. And, you know, we actually got to know, for example, some tea plantation workers who are amongst the poorest in Sri Lanka, and that helped us also understand a little bit better the social safety net and how it works. And so we pay a lot of attention to this. So there are different aspects to ensuring, you know, proper social outcomes.

Inflation had affected the poor a lot and bringing down inflation from these very high levels, from 70 percent to, well, it was 0.9 percent recently, but to these low single digit levels was a key way of ensuring that the poor are not being punished further by continuing high inflation. And then there's, of course, the floor, the minimum spending that we have agreed with the government on social protection. And maybe Sarwat, would you like to come in on this?

MS. JAHAN: Thank you, Peter. And indeed, I'd like to echo that protecting the poor and the vulnerable is a very important component of our program. When we started the program, we negotiated with the authorities about the minimum spending floor for each quarter. And there is an understanding that if there is significant improvement in the economy, the government can do even more. We have discussed with the authorities and have continually encouraged them to meet the spending targets.

There have been some administrative issues that the authorities have faced. For example, they received quite a lot of grievance cases and there were issues with opening up of bank accounts. And we have strongly encouraged the authorities to overcome these bottlenecks so the cash transfers can be smoothly provided to those who need it the most. We understand that the second round of applications was called and about 450,000 applicants had applied for the cash transfers. The data validation is underway.

We are also encouraging the authorities to look at surveys to understand whether targeting has improved and whether there are other ways Sri Lankans can be helped. We understand that along with the World bank and ADB, the authorities are also thinking about a livelihood improvement program that will help people graduate into higher income levels and therefore may not be dependent on cash transfers. And we will continue to strongly encourage the authorities to keep an eye on this vulnerable sector. Thank you.

MS. VU: Thank you very much, Peter, Katya and Sarwat. We have come to the end of our press briefing today. The video recording and transcript will be posted on imf.org. And thank you everyone for joining us today, and we look forward to seeing you at our future briefings. Thank you.

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