Transcript

Transcript of Press Briefing: Sri Lanka, November 2024

November 27, 2024

Colombo, Sri Lanka

Speakers:

PETER BREUER

Senior Mission Chief for Sri Lanka

KATSIARYNA SVIRYDZENKA

Deputy Mission Chief for Sri Lanka

MARTHA TESFAYE WOLDEMICHAEL

Resident Representative in Sri Lanka

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MS. WOLDEMICHAEL: Good morning, ladies and gentlemen.  Thank you very much for joining us today, and welcome to the IMF Press Briefing.  I am Martha Woldemichael.  I'm the IMF Resident Representative based here in Colombo.  

So, as you know, the IMF Mission Team has been in Colombo since November 17, and the focus of the mission is to assess progress of the reforms under the Third Review of Sri Lanka's EFF supported program.  

Joining me today are Peter Breuer, the Senior Mission Chief for Sri Lanka, and Katya Svirydzenka, the Deputy Mission Chief for Sri Lanka.  Let me turn to Peter now, who will start with some opening remarks.  

MR. BREUER: Thank you, Martha, and thank you all for being here on a Saturday. We appreciate your interest in our work.  It's always a pleasure to engage with you. 

So today I thought I start on a personal note.  This summer I had a chance to travel through Sri Lanka with my family and have now seen many different parts of the country.  And what stood out to me was the remarkable resilience with which people tackle the daily challenges that they face every day.  The enormous challenges of the country are reflected in their lives. 

But while it was clear from my travels that a lot needs to be done, I do would like to commend the Sri Lankan people and authorities who have taken forward an ambitious reform program that has helped put Sri Lanka's economy on the track for recovery.  Completing the reform agenda to achieve more inclusive and sustainable growth will benefit all Sri Lankans, including the many I encountered during my travels. 

Now with this, let me turn to my initial remarks. 

As Martha mentioned, we are here in Colombo to conduct the Third Review of the 4-year EFF supported program.  We had productive discussions with the authorities and a broad spectrum of stakeholders, including parliamentarians, representatives from the private sector, civil society organizations, and development partners. 

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 with the Sri Lankan authorities on the Third Review under the 4-year Extended Fund Facility Supported Program.  I would like to highlight that the agreement at the staff level is subject to the approval by IMF Management and the IMF Executive Board.  Completion of the review by the IMF Executive Board requires the implementation by the authorities of prior actions, including the submission of a 2025 budget consistent with program objectives.  And it also requires confirming that the program remains adequately financed. 

Upon completion of the Executive Board review, Sri Lanka would have access to about $330 million.  This would bring IMF financial support dispersed under the arrangement to a total of about $1.3 billion. 

In terms of the macroeconomic situation, Sri Lanka's ambitious reform agenda, supported by the EFF, is delivering commendable outcomes.  The economy expanded on average by 4 percent year-on-year in the four quarters ending in June of this year, and high frequency indicators point to continued expansion across all sectors.  Average headline and core inflation remained contained at 0.8 and 3.8 percent during the third quarter.  Gross official reserves increased to $6.4 billion at the end of October with sizable foreign exchange purchases by the central bank.  Public finances have strengthened following substantial fiscal reforms.  

Now turning to progress with respect to the reform agenda under the EFF, I would like to point out that program performance has been strong.  All quantitative performance criteria and indicative targets for end June 2024 were met except for the target on social spending.  And similarly, the targets for in September 2024 were met except for the one on social spending.  Most structural benchmarks due before October were either met or implemented with delay.  Some benchmarks are delayed because of the election cycle.  

I would like to note that the new government's commitment to the program objectives has enhanced confidence and ensures policy continuity.  Sustaining the reform momentum is critical to safeguarding the hard-won gains of the program.  It is also critical to put the economy on a path towards lasting recovery and stable and inclusive growth.  Since the crisis has affected Sri Lanka's entire population, it will be important to ensure that the benefits from the economic growth are shared appropriately across the population.  

Maintaining macroeconomic stability and restoring debt sustainability are key to securing Sri Lanka’s prosperity and require persevering with responsible fiscal policy.  Continued revenue mobilization efforts and spending restraint are needed to prepare the 2025 budget in line with program parameters.  Revenue administration reforms and efforts to improve tax compliance will help to ensure that the burden stemming from the crisis is shared proportionately to taxpayers’ ability to contribute.  Avoiding new tax exemptions will help reduce fiscal revenue leakages, corruption risks and build much needed fiscal buffers, including for social spending and to support Sri Lanka’s most vulnerable.  Maintaining cost recovery in fuel and electricity pricing and resolving legacy debts will help minimize fiscal risks arising from state-owned enterprises.

Now let me emphasize here that the government has an important responsibility to protect the poor and vulnerable at this difficult time.  It is important to redouble efforts to meet the program’s minimum spending target on social spending and to improve targeting, adequacy, and coverage of social safety nets, particularly Aswesuma.

Regarding inflation, it has decelerated faster than expected.  However, continued monitoring is warranted to ensure sustained price stability and to support macroeconomic stability.  Against ongoing global uncertainty, it remains important to continue rebuilding external buffers through strong reserve accumulation. 

Regarding the debt restructuring process.  Sri Lanka’s recent Agreement in Principle with bondholders is an important milestone.  It puts Sri Lanka’s debt on a path towards sustainability. The critical next steps are to complete the commercial debt restructuring, finalize bilateral agreements with official creditors along the lines of the accord with the Official Creditor Committee and implement the terms of the other agreements.  This will help restore Sri Lanka’s debt sustainability.

Finally, the new government’s mandate will reinvigorate governance reforms addressing corruption risks, rebuilding economic confidence, and making growth more robust and inclusive.

I would like to thank the authorities for the excellent collaboration.  And with this, let me hand it back to Martha. 

MS. WOLDEMICHAEL: Thank you very much, Peter.  Now let me open the floor for questions.  May I please ask if you can raise your hand if you have a question, and before you ask your question, it would be great if you could introduce yourself and share your media affiliation.  Thank you very much.  

QUESTIONER: From Economy Next.  From the completion of the Third Review to approval of the fourth disbursement, what are the steps?  What are the conditions on Sri Lankan part to complete? 

MS. WOLDEMICHAEL: Thank you very much. Let's take a couple more questions please.

QUESTIONER: Indica Sakal Surya (phonetic) from Economy Next.  There were talks that the new government wants personal income taxes reduced the ratio of the percentage.  So whether these ideas came in during the discussions?

MS. WOLDEMICHAEL: Thank you very much. Maybe one more question.

QUESTIONER: Just a couple of questions if you don't mind. 

MS. WOLDEMICHAEL: Yes.

QUESTIONER: The IMF has emphasized the need for structural reforms when it comes to public sector management, state-owned enterprises, and even tax collection.  What tangible results have you seen the government achieve?  And how do you assess the government's commitment to implementing these reforms in a timely manner?  And also, the new government is yet to lay out their foreign and monetary policies.  How does this affect your review?  

Also, one final question.  The previous government said that vehicle import restrictions will be lifted by February 2025 if the current government goes ahead with it.  Does the IMF recommendations comply with it?  Thank you.  

MS. WOLDEMICHAEL: Could you repeat your second question?

MR. BREUER: The second actually.

MS. SVIRYDZENKA: Can you repeat all of them actually?

MR. BREUER: The first two.

MS. SVIRYDZENKA: Thank you.

QUESTIONER: Yes.  The IMF has emphasized the need for structural reforms when it comes to public sector management, state-owned enterprises, and tax collection.  So what tangible results have been achieved in these areas so far?  And how do you assess the government's commitment to implementing these reforms in a timely manner? 

The second question is that the new government is yet to lay out their foreign and monetary policies.  So how does that affect the IMF review? 

And the final question is that the previous Government said that vehicle import restrictions will be lifted by February 2025.  So if the current government goes ahead with that decision, will this comply with the IMF recommendations? 

MS. WOLDEMICHAEL: Thank you very much. That's very clear. Let me turn to Peter. 

MR. BREUER: Okay. Yeah, thank you very much. So what are the steps between now and disbursement under the Third Review, which will be the fourth disbursement?  So, as I mentioned at the outset, there are some prior actions and those relate mostly to the budget.  So because of the elections, the budget process is taking place later this year.  So we will be interested in making, you know, convincing ourselves that this budget is in line with the program objectives.  So we'll be having a very close discussion with the authorities on that. 

But this is also now in line with the second question.  The authorities have committed to stay within the guardrails of the program, meaning important guardrails are the primary surplus, the revenue, and also the quality of the fiscal measures.  And within those guardrails, we have agreed on a package that allows them to achieve their priorities and objectives, and that will eventually be documented in the budget that the government is preparing.  And as soon as that is submitted to Parliament, it will then be possible to go ahead with the process for the Fourth Review.  In the meantime, of course, we will do our part in terms of preparing the underlying staff report and consulting with the appropriate stakeholders.  Why don’t you go on.

MS. SVIRYDZENKA: With regard to the question of the structural reforms, particularly in the areas of public sector management, state-owned enterprises, and tax collections, just to name a few, there's been a lot of reforms already adopted by the government.  For example, the new Public Financial Management Act will instill principles of good governance and transparency into Sri Lanka's public finances.  

Cost recovery -- cost recovery energy pricing is an important pillar of the IMF-supported program to reduce the fiscal risks from state-owned enterprises to make sure that they're no longer a burden on the public finances and taxpayer.  Legacy debts of the SOEs are also being repaid and resolved, further reducing those risks.  There's been significant effort to improve tax collection and improve governance in the various tax collecting agencies.  

So overall, we see a clear commitment from the government to the structural reform agenda and improving governance and accountability in the public financial management.  Thank you.  

MR. BREUER: So, on the other two questions.  So monetary policy, of course, remains in the purview of the central bank and this government has committed to or reaffirmed its commitment to the independence of the central bank, which of course is a very important pillar under the program.  This is one of those hard-won gains with the Central Bank Act having passed last year.  

Of course, the area of lifting the import restrictions on motor vehicles.  That is a decision by the government that has implications with respect to monetary policy.  So, yes, that is a part that we have discussed.  In fact, we have already discussed in the previous review.  Lifting these restrictions will be a very important source of revenue for the government in the year ahead.  So it's one of the sort of, you know, more and more rare opportunities to raise revenue in Sri Lanka.  So it'll be an important part of that.  Of course, it needs to be managed carefully with respect to the reserves of the country.

Yeah, let me stop there.  

MS. WOLDEMICHAEL: Thank you very much, Peter and Katya. Let's take another round of questions, please.

QUESTIONER: Yeah.  Marwan Macan-Markar of Nikkei Asia.  You've praised the government for sticking to the commitments of the previous government to continue with the program.  But there's a larger political question at play here.  The former president, who did a fairly good job in negotiating with you, lacked political legitimacy given how he ended up in that position.  Whereas you have a current president, a new government that has come into power on a sweeping landslide mandate.  What kind of space would the new government have to adjust the program if, say, your targets result in a crippling of the growth and may have to adjust some of the targets given that the mandate the current government enjoys is substantially much more larger and more secure than the predecessor? Thanks.  

QUESTIONER: I'm Prasad from Republic World International Television.  You mentioned about the missing the targets of social spending area in the previous two occasions, but now there's a new government in power and they also have -- they made a number of pledges during the election regarding the social areas.  So how do you see this situation?  How can you balance this situation in your program according with the government's program?  

MS. WOLDEMICHAEL: Thank you. One more question.

QUESTIONER: Nisthar from Daily FT.  A follow-up to Marwan’s question.  Given the strong mandate, it also implies that the people had rejected the previous government's policies and the stance going forward.  Yes, there is agreement on the part of the government to continue the program, but the very people that you were trying to protect through Aswesuma and all that had clearly spoken against some of the taxes and lack of relief and growth issues.  What would be IMF's response to the people who -- the average people of Sri Lanka -- who voted this government into power?  

MS. WOLDEMICHAEL: Thank you very much. Peter, let me first turn to you.

MR. BREUER: Oh, okay.

MS. WOLDEMICHAEL: Yeah.

MR. BREUER: Thank you.  So Martha will answer the question on the social spending.  So the questions around the government and the mandate.  Regrettably, the challenges in Sri Lanka haven't gotten any less despite the change in government.  The economic challenges I'm talking about, and that is recovering from this, one of the most severe crises that Sri Lanka has experienced in its history in 2022.  The effects of that will be felt for quite some time.  

And of course, the key -- one of the key underlying causes of the crisis was the lack of fiscal revenue.  The tax revenue in 2022 was in the order of 7 percent of GDP, I think the second lowest in emerging markets.  Actually, we have a chart in our staff report from the Second Review that illustrates that quite nicely.  So having to recover from that remains the key challenge for Sri Lanka in order to be able to refinance all that debt that will become due, especially after the debt has been restructured and new debt will eventually have to be paid.  So there has to be a way of being able to roll over the debt, accessing the markets and rolling it over.  And that's only possible if there are the fiscal resources to do that.  So raising tax revenue remains a key priority while remaining prudent with expenditure.  

So of course, political stability is a very important part the context in which economic reforms take place.  So a government with a strong mandate bodes well for political stability.  And we take comfort from the commitment that this government has given with respect to persevering with the economic reforms and staying with the -- the reforms.  It really seems., you know, as I said at the beginning, macroeconomic stability and restoring debt sustainability are really the key way for Sri Lanka to regain its prosperity and grow out of this crisis.

So maybe just one more point.  You spoke about the people, the Aswesuma recipients.  It's important to remember who pays taxes in Sri Lanka.  It's really about the top 20 percent of income earners.  So about top -- the top 20 percent of people in the income distribution are making all the tax contributions that the poor don't pay taxes.  So if taxes are increased, it affects a certain segment of the population, but not the poor.  

In fact, we have been having good discussions about not having been able to meet this minimum spending flow on the social safety net.  And we have encouraged the government to address the underlying impediments.  There were good reasons why it wasn't possible to get this money to the recipients.  They needed ID cards to open bank accounts, opening these bank accounts, all that took time.  But we think it's important to address these impediments so that the money that's intended to go to the recipients can in fact get there.  And this government has expressed its strong commitment to that same shared goal.

MS. WOLDEMICHAEL: Thank you, Peter. So I think you've broadly addressed the question on social spending, but just to reemphasize that one of the core pillars of the IMF program is really to protect the poor and vulnerable, as Peter highlighted, and we particularly track cash transfers under the Aswesuma program. So in that sense, the government's objective to protect the poor and vulnerable is very much in line with the EFF arrangements objective, and there is understanding on the importance of strengthening social safety nets, in particular improving the coverage, the adequacy, and the targeting under the Aswesuma program. 

Just to give you an example, we welcome the recent decision to increase the beneficiary amount of cash transfers for the poor and extremely poor categories.  So this is something we will be looking at very, very closely as well.  Thank you. 

Shall we take another round of questions?  Please. 

QUESTIONER: This is Asantha Sirimanne from Bloomberg News.  Is the program going to be on the same track?  Will it be refaced because of the delay?  Will we have the December review by the time that was set in the earlier one?  Like April or something, I think it was.

MS. WOLDEMICHAEL: Just to make sure I caught the question. So the question is whether the program is still on track despite the delays from the elections?

QUESTIONER: Yeah.  So whether the future ones will be refaced or with the same dates that we thought talk of talked of earlier?  And whether the June review, when will the June -- sorry, the December data based on that?  When will it happen? 

MS. WOLDEMICHAEL: Okay, thank you. Let's take another question.

QUESTIONER: IMF has always highlighted the need for SOE reforms, state-owned enterprises reforms.  What is your impression about the new government's commitment for such reforms? 

MS. WOLDEMICHAEL: Okay. Lady in the back. Yes, please. 

QUESTIONER: Minelle Fernandez, Al Jazeera.  One of the criticisms that came up during the negotiations about the IMF and once the bailout was announced was that some of the reforms unfairly sort of target the poorer segments of society and the more richer brackets of Sri Lanka's population were left relatively unscathed.  The NPP government has talked about making things more fairer in terms of particularly things like taxes and raising revenue.  Was this something that was raised in negotiations that you had with the government?  And how would you describe , if at all, those proposals?   

MS. WOLDEMICHAEL: Thank you very much. Maybe one last question. Yeah.  Okay. 

QUESTIONER: Uditha Jayasinghe from Reuters.  In the statement you talked about the change or the importance rather of concluding the Bondholder Agreement.  Is there a timeline for when that should be completed?  And please share your thoughts on how soon you would like to see that completed.  Thank you. 

MS. WOLDEMICHAEL: Thank you very much. Peter? Yeah, thank you. 

MS. SVIRYDZENKA: So on the question on SOE reform, it is important that SOEs are managed in a prudent manner without becoming a burden on public finances and the taxpayer money.  The authorities have emphasized their commitment to ensure that that indeed will be the case.  And for example, one of the key commitments under the program is cost recovery energy pricing both in electricity and fuel, which ensures that there are no longer accumulation of losses in this state-owned enterprises.  There's also commitment under the program to become more transparent in terms of publishing, for example, financial statements of state-owned enterprises, that also helps to ensure that this commitment stays on track.  

MR. BREUER: Okay, so thank you for these questions.  With respect to the question on is the delay of the program.  So yes, compared to last -- last year we were here in September and we had the Board meeting in December after essentially it was clear what was going to be in the budget.  This year, of course we accommodated the democratic process, the elections, and accordingly, we are now here in November, so a little bit later.  And that naturally will also affect the timing.  It affects the timing of the budget process and then accordingly the timing of the disbursement of the IMF.  

With respect to -- now, I don't think it's a large delay.  And Sri Lanka, I think, is well positioned to live within the effects of that delay.

With respect to the subsequent reviews.  So we will have to see when exactly the Board meeting can take place and what is the knock on effect on subsequent reviews.  But we will seek, as long as policy remains on track, we will of course try to find a way to make up for that delay so as to bring the program back to its regular schedule.  This is something we will need to discuss going ahead. 

On -- so you said the, the program was targeting the poor.  I would respectfully disagree with that.  It's targeting the poor to help them out.  So we have to acknowledge -- so this crisis is extremely costly for the population, for everybody in Sri Lanka.  There's no doubt about that.  It affects the poor the most because they don't really have the buffers to -- to deal with the cost.  The slightly better off are also affected, but they have some buffers to deal with it.  And also it's important to remember that this hardship, it doesn't come from being imposed by the IMF.  It's the result of the crisis that has taken place.  The IMF is here to help with that.  To help have a program that allows bringing the economy back on track so as to help everybody in the country.  And we have in particular parts of the program that help the poor. 

So let's start with macroeconomic stability.  That's first and foremost something that matters for the poor the most.  Because if you restore the economy and find a way for it to grow, that is an environment in which the poor are more easily -- where their livelihood doesn't deteriorate.  So macroeconomic stability is really a precondition, as we have seen when there wasn't macro stability in 2022.

Inflation is a key manifestation of macro stability.  So we have seen very large inflation in 2022.  70 percent.  That affects the poor the most.  In fact, we visited plantation workers in Nuwara Eliya in one of our visits, and they showed us how much they make, how much they have to pay, the electricity costs, and so forth.  So there is no room for them really on any discretionary expenditure because the high inflation is eating up everything that they have.  So this very significant and rapid disinflation that has taken place in Sri Lanka is the result of restoring macro stability and helps the poor.  Even though we recognize that the price level itself stays high, you do have small disinflation at the moment in Sri Lanka, of course, but once prices have gone up, they stay high.  So now the priority becomes to get incomes to catch up with that so that in real terms, the poor, their livelihoods can be improved.  

Also, maybe just to note that tax reforms are progressive.  Now, that's a different segment, as I said, of the population, but they are -- the reforms that took place since 2022 have been to make the tax regime as progressive as possible so as to have a lighter burden on the lower income tax earner and more on the higher income tax earners.  

Finally, there's a question on the bondholders on the restructuring.  So for us, as at every review, we conduct this so-called financing assurances review, and we look at the restructuring from that perspective.  The key question for us is: is there good progress with restructuring the debt and moving away from areas to debt that is being serviced and that is sustainable, of course.  And in Sri Lanka we have seen very good progress.  There has been agreement in principle with the commercial bondholders, and the authorities are working on the next steps to move that forward.  So they are doing everything that you would expect to be done at this point.  And our understanding is that this process will go forward swiftly.      

MS. WOLDEMICHAEL: Thank you, Peter. I'm mindful of the time. Maybe you can take one last question and close this session, if any?  Thank you. 

QUESTIONER: Have you discussed some of the proposed taxes, like property taxes, with the government?  And if the government is not going ahead with them, what are some of the offsetting measures might have?

QUESTIONER: Given the strong mandate from the people, is IMF sort of revisiting your own stance on the way forward?  Will you be flexible as well?  Given the strong mandate from the people, including the middle class, who voted the previous government out, is government sort of rethinking its own strategy or stance on Sri Lanka's way forward or you're basically your firm, and you won't show any flexibility going forward.  

MS. WOLDEMICHAEL: Thank you. Thank you very much. So we have two questions.  Peter, over to you. 

MR. BREUER: So the two questions are actually similar somewhat.  So as I said, the challenges for Sri Lanka are the same.  So Sri Lanka has to think about how to address these, how to ensure a full recovery from the crisis, and have stable and inclusive growth.  And so the main guardrails of the program are designed in such a way to facilitate that.  Within those guardrails, a review is an opportunity to take stock of developments and to look at are any adjustments to the program necessary.  We have done that at the First Review, and we have done that at the Second Review, and that happens at every IMF review of IMF programs.  

So we do discuss with the authorities their preferences for how they want to adjust the program.  And we have managed to reach staff-level agreement on the basis of a way forward that stays within the guardrails of the program but at the same time allows the authorities an opportunity to make amendments in line with their priorities, and they will put these in their budget proposals at the appropriate time.  

MS. WOLDEMICHAEL: Thank you very much. Thank you, Peter and Katya. I think we have come to the end of this briefing.  Let me thank you, ladies and gentlemen, for joining us today.  So we look forward to seeing you at our future press briefings.  But in the meantime, if you have any questions, any follow-up questions, please do not hesitate to reach out.  Thank you again.