Transcript

Transcript of Press Briefing on the Completion of the Third Review for the IMF Extended Fund Facility for Sri Lanka

March 5, 2025

PARTICIPANTS:

PETER BREUER

Senior Mission Chief for Sri Lanka

KATSIARYNA SVIRYDZENKA

Deputy Mission Chief for Sri Lanka

MARTHA TESFAYE WOLDEMICHAEL

Resident Representative in Sri Lanka

MODERTOR:

RANDA ELNAGAR

Senior Media Officer

TRANSCRIPT:

Ms. Elnagar:  Good morning to our participants who are joining us from Asia and good evening to our participants in DC. Welcome to the press conference on of the Third review of Sri Lanka’s Extended Fund Facility Arrangement with the International Monetary Fund. I am Randa Elnagar, with the IMF’s communications department.

I am joined today by three speakers. Peter Breuer, IMF’s Senior Mission Chief for Sri Lanka; Katsiaryna Svirydzenka, Deputy Mission Chief for Sri Lanka; and Martha Tesfaye Woldemichael, IMF’s Resident Representative in Sri Lanka.

By now you should have seen the press release, which we issued on Friday and the staff report is not on IMF.org. First, Peter will give some opening remarks, and then we will take your questions.

We are kindly asking you to mute your microphones throughout the briefing, unless you are asking a question. Peter the floor is yours.

started transcription

Mr. Breuer: Thank you, Randa. Good morning, all, thank you very much for being here and for your interest in Sri Lanka’s IMF-supported economic reform program.

I am pleased to announce that, on Friday February 28, the IMF Executive Board approved the third review under the 48-month Extended Fund Facility Arrangement with Sri Lanka. This provides the country with immediate access to about US$334 million to support its economic policies and reforms.

It brings the total IMF financial support dispersed so far to about $1.3 billion.
The IMF continues to support Sri Lanka's efforts to restore and maintain macroeconomic stability and debt sustainability while protecting the poor and vulnerable rebuilding external buffers. Safeguarding financial sector stability and enhancing growth oriented structural reforms, including by strengthening governance.

The IMF Executive Board's approval to complete the third review recognizes the strong program performance. All quantitative targets for end December 2024 were met, except for the indicative target on social spending.
Most structural benchmarks do by end January 2025 were either met or implemented with delay.

Turning to through the macroeconomic situation, it is encouraging to see that reforms in Sri Lanka are bearing fruit with the economic recovery gaining momentum, inflation remains slow.

Revenue collection is improving and reserves continue to accumulate.
Economic growth averaged 4.3% since growth resumed in the third quarter of 2023.
The recovery is expected to continue in two thousand 2025 now. Despite these positive developments, the economy is still vulnerable.
It is critical to sustain the reform momentum to ensure macroeconomic stability and debt sustainability.

And to promote long term inclusive growth, there is no room for policy errors.
Let me emphasize that sustained revenue mobilization is crucial to restoring fiscal sustainability.

And ensuring that the government can continue to provide essential services.
Boosting tax compliance and refraining from tax exemptions are key to maintaining support for economic reforms.

Let me also emphasize that to ease economic hardship and ensure the poor and vulnerable can participate in Sri Lanka's recovery, it is important to meet social spending targets and continue with reforms of the social safety net going forward. Social support needs to be well targeted towards the.

Most disadvantaged, so as to promote inclusive growth with limited fiscal space.
Restoring cost recovery, electricity pricing without delay is needed to contain fiscal risks from state owned enterprises.
A smoother execution of capital spending within the fiscal envelope would foster medium term growth.

The recent successful completion of the bond exchange is a major milestone towards restoring debt sustainability, timely finalization of bilateral agreements with creditors in the official creditor committee, and with remaining creditors is a priority now. Regarding monetary policy, I would like to highlight that it should prioritize maintaining price. Stability supported by sustained commitment to prohibit monetary financing and.

To safeguard central bank independence. Continued exchange rate, flexibility and gradually phasing out the balance of payments measures remain critical to rebuild external buffers and facilitate rebalancing.

As for the financial sector, resolving non performing loans, strengthening governance and oversight of state owned banks and improving the insolvency and resolution frameworks are important priorities to revive credit growth and support the economic recovery.

Finally, prolonged structural challenges need to be addressed to unlock Sri Lanka's long term potential, including steadfast implementation of governance reforms.
I would like to thank the authorities for their commitment and excellent collaboration.

Let me also take this opportunity to announce that as part of a standard staff rotation process, I will soon be transitioning from the role of mischief for Sri Lanka.
And I will be handing over to the next mission Chief Evan Papageorgiou, during the next mission. It has been an honor to accompany Sri Lanka on his journey out of this.

Severe crisis for nearly three years. While there are more challenges ahead, the IMF team will remain a steadfast partner for Sri Lanka and its people on the road to a more sustainable and inclusive recovery.
I will be moving to another assignment soon and wish the people of Sri Lanka continued success with the economic recovery.
With this, let me hand it back to Rhonda. Thank you.

Ms. Elnagar: Thank you so much, Peter.
Colleagues, please raise your hand and identify yourself if you want to ask your question and turn on your camera, if possible and the mic. Thank you. I see the first hand, please.

QUESTIONER: Thank you, Randa. This is Shihar Anis from economy next.
I hope you can hear you.

Ms. Elnagar: We can hear you well, Shihar. Thank you.

QUESTIONER: OK. So my question is now there is a delay in the SOE restructuring because we don't see the same speed that the previous government was doing, the SOE restructuring this government has been. Basically, they are not into privatization, but they are looking into a different model. How concerned are you on that? You know, delay or the current restructuring model.
Thank you.

Ms. Elnagar: Thank you. We'll take another couple of questions and then answer them in groups.

Ms. Elnagar: The audio. Zulfiq there is a lot of static on your mic.

QUESTIONER: Hope you can hear me. I have two questions. That is, it has come to light that the Sri Lankan Government plans not to proceed with the imputed rental income tax as a revenue measure. So has this been discussed with the IMF and is there any other alternative that is being put forward and at the same time, what is IMF stake on the budget that was presented recently?

Ms. Elnagar: Let's take another question. Sampath, please.

QUESTIONER: Hi I'm Sampath Dissanayake from BBC Sinhala service.
The government is increasing the tax as per the IMF advice to increase government revenue. The number of people receiving Social Security benefit in benefits in Sri Lanka is increasing annually. So do you believe that the increase in tax burden is increase for reason for this?

Ms. Elnagar:  Peter, we can take these three questions.

Mr. Breuer: Yes, thank you very much. So let me answer some of the questions.
On the budget and fiscal, and maybe Katie can answer the question on the.
SOE reforms so the. Imputed rental income tax was a measure proposed by the previous administration as part of a possible revenue package for 2025, and the new authorities have proposed a slightly different package that is aligned with their mandate and priorities. And staff and the authorities have assessed that this package is sufficient to meet the revenue targets under the program. Now of course, should those measures prove insufficient, then additional revenue measures would be needed. And so that also. Ties in with the question on the budget and tax revenues. So yes, we have looked at the budget. And have, of course, disgusted with the authorities. There's more detailed explanation in the staff report that should be online now, so there's a table on page 12 that kind of lists some of the main measures needed to. reach the goal for tax revenue for next year. Yeah, reallybthe objective here is as you know tax revenue was a key driver of the crisis in 2022.
Sri Lanka was the lowest that the country with the lowest tax take amongst.
Middle income countries and low income countries in the world, and so it has made significant progress since then. Tax as a share of GDP, he has increased by 5 percentage points from somewhere. You know 7 to somewhere 12.4% or so last year. So that's a significant increase, but by no means is excessive and. The essential services that the government provides need to be funded and for that reason.
Working on ensuring that there is sufficient tax revenue remains a priority.
And so social services, which was the 3rd question is just a portion of the overall essential services that that the government provides and is just a component on that actually. Maybe Marta can add on that point and cut you a can speak to the SOE reforms.

Ms. Svirydzenka: So should I go first? OK. So on the on the SOE restructuring, the most crucial element is that the state owned enterprises are managed in a prudent manner so as to avoid the accumulation of losses or debts that then would eventually need to be repaid by the taxpayers. And in that sense, the SOEs can be managed prudently while remaining state owned or they can be divested partially or completely.

We are reassured by the authorities commitment to ensure that this enterprises do not become a burden for the budget or for the government debt in terms of other key elements under the program has been the cost, reflective pricing of services provided by so especially in the area of electricity and fuel prices. Other commitments under the program include making SOEs more transparent, in particular by publishing audited financial statements of the largest, SOEs in a timely manner.

And then finally, to allow the economy to grow, it is important that the consumers of services receive the best value for the price of being charged. So this involves running, SOEs in the most efficient manner and ensuring that they are following the best governance principles. So in that sense, we're quite satisfied with the progress, yes.

Martha Tesfaye Woldemichael: So let me maybe come in then to compliment a bit Peter's response on the social spending, right. So there's a question. Why social spending is increasing? I think this is a good opportunity to remind that protecting the poor and vulnerable is really an important component of the EFF program. So the EFF supports this objective through the different reforms through macro stabilization. But importantly, there is also a floor on social spending in the program that we assess on a quarterly basis. So this means the government has to spend a minimum amount to protect the poor and vulnerable.

So in this context, the key commitment is really for the authorities to continue strengthening the coverage, the adequacy and the targeting of social spending. So recent announcement related to the expected decrease in the payments, for instance for the poor and extremely poor categories under a ASWASUMA or the.
Announcement that the payments would also increase for the elderly, the disabled and chronic kidney patients are aligned with the authorities commitments to continue strengthening, strengthening social safety Nets and I think it is also very important to make sure that this coverage under the ASWASUMA program. Is above the poverty rates that are currently observed. I think I will stop here. Thank you very much. Back to you, Randa.

Ms. Elnagar: Thank you, Martha. We're first going to take a question from Kelum.
I think Shihar you had your hand raised, so it's from the first question. So if you can, please put your hand down because it's a bit confusing, but we're going to go to Kellum 1st and then Asante. So Kelum, please go ahead.

QUESTIONER: Thank you. Can you hear me?

Ms. Elnagar: Yes.

QUESTIONER: Yes, I'm Kelum Bandara, from Daily Mirror newspaper. So my question is wanting the overall assessment about the budget, actually that was answered was that next day and the next question is, how important is it for the government to proceed with this Economic Transformation Act to reach the economic targets? Actually in searching by MFN or for the broader infrastructure of the country.

Ms. Elnagar:  Thank you Asante. If you can, please pose your question.

QUESTIONER: Yeah, so, the government has started the import duty on vehicles, which just knocked out earlier. Yeah, I think all the taxes were kind of like excise taxes. And so have you made any assessment on whether this will lead to an increase in assembled vehicles, which earlier didn't get this tax protection and how much leakage of revenue might happen to the assembled sector and whether any effect to publish a kind of a tax expenditure statement to say how much of the import duties lost due to any increase or the sales of the assembled vehicles which are like got CKD, I think tax free the parts and also have you had any discuss? With the central bank. On offloading their government securities now that the Treasury bills

Ms. Elnagar: Thank you, Asantha. There is a question in the chat which we're going to take and then move to the ones online. Amal, you didn't verify your organization.

QUESTIONER: Oh, and I have actually done that. I'm from AFP, the French news agency, Agence France Press.

Ms. Elnagar: Hi would you like to ask? Yeah, because you post in the in the chat.

QUESTIONER: Oh yeah. I mean, if you want to save time, can just answer that.
I mean basically I was trying to ask Peter how concerned you are about sort of emerging labor unrest, particularly now in the medical field. The doctors are threatening to go on strike from tomorrow, although there is a pay increase that the increase is less than the. Reduction of their allowances. So this is something that affects a lot of not just the medical sector. So how concerned are you that this kind of growing unrest, labor unrest, how it will affect the overall IMF backed program?

Ms. Elnagar:  Peter, do you want to take another question?
So they are three. So I think Indiqa is next.

Mr. Breuer:  Well, there's actually an under. It feels like there's a bunch of questions.
Should we try and answer these?

Ms. Elnagar:  OK. Sounds good.

Mr. Breuer:  And maybe Katya can speak to the Economic Transformation Act.
And also to the central bank question so. On this important question with respect to the potential for unrest. Well, I suppose there is potential, but I think what really should be remembered is that this budget really sought to address some of the concerns that the government and ourselves have hurt that. You know, civil servants have been concerned about. The wages that they have been receiving and so.
There is for the first time in a long time, an increase in civil service wages, while at the same time the personal income tax regime is were being changed and reducing personal income taxes considerably, at least for some. Income earners, including civil servants, you have to remember who are the ones who earn an income and pay taxes that really is the upper 20% of income earners in Sri Lanka. There has been a massive crisis in 2022 with huge costs to the population of Sri Lanka and in order for the government to keep on providing the essential services that the citizens of Sri Lanka expected, expect the government to provide and in order to bring along the poorer segments of society. Everyone who can needs to make a sacrifice.
This is how the society can pull together and continue to function, and so.
I think we all know how painful this crisis has been there's no doubt about it.
We have travelled around the country, we have met with many people.
You know the plantation workers in Noro, alia have shown us their income statements and their bills. And it was very, very clear that this is a very severe crisis, but how else to address it. So, sticking with the reforms is really the best way out for Sri Lanka to assure its sustainability, and I think it's important for everyone in Sri Lanka to recognize that.

If you put it into the broader perspective the adjustment, this is the last budget.
Where there is still a bit of an increase in in revenue is needed 1.5 percentage points of GDP, but all the hard adjustment has already taken place in the previous two years. You know revenue have increased 5 percentage points of GDP over the last two years. This is, you know, the last sort of big push. Not quite as big as in the previous years, and there after it'll be much easier going forward.

So on the cars I mean that’s a specific question. Does is there some import substitution? I can't answer that. I would assume that after five years or so of a ban of imported cars that there will be some demand for finished cars from overseas.
I do take your point that it's possible that there may be some assembly of cars domestically.

Katya, can you answer the other two questions please?

Ms. Svirydzenka: Sure. So on the economic transformation, bill, we understand there was a recent announcement that the new government will propose amendments to the bill. And so we look forward to reviewing the amended economic transformation bill. We expect it to be consistent with program objectives, including for example with the authorities’ commitment to refrain from granting tax.
Incentives until the STP act is revised to provide clear and transparent criteria on the granting of tax incentives on the. Central Bank Securities, I understand the question was that the Central Bank has sold T-bills but has a stock of on marketable bonds. And this is correct. And under the program at this point, because there's no market for this restructured bonds, we do not envision they unwinding of this stock and over the next 12 months you can see it in the program targets in table one on page 95 of the published report under the category of net credit to the government.
I hope that answers the question. If I understood it correctly.

QUESTIONER: So, I am trying to find out what's the alternative if you want to sterilize the inflows. I mean, kind of issuing central banks equity or something, but you have reserve target.

Ms. Svirydzenka: Is this more than a question about the operation of monetary policy and how to sterilize reserve accumulation?

QUESTIONER: Yeah. Yeah. Because you don't you?

Ms. Svirydzenka: Perhaps I misunderstood.

QUESTIONER: You no longer have the tables to sell. What is the alternative securities they can sell to build?

Ms. Svirydzenka: Yes, I understand. Thank you so much for clarifying. Yeah. So there are many alternatives that the Central bank can use. For example, they can engage in repo operations or also issue their own securities. But I guess what is important to highlight for your question is that the Central Bank so far has been able to meet the inflation target and if anything, they're a little bit undershooting as you saw with the breach of the MPCC clause in June and in December. So in that sense, the central bank is quite effective in terms of reaching the inflation objectives and we think the tools they have in their, in their in their hands should be enough.

Ms. Elnagar:  Thank you, Katya. We have more questions, Peter.
We have Indika first please.

QUESTIONER:  Hi, Randa. Thank you, I think. I hope I'm audible.

Ms. Elnagar: Yes you are.

QUESTIONER: My questions, question to Peter is in the budget, there is a budget proposal to recruit about 30,000 people to the public sector. So we already have a bloated public sector in the country. So what's your what's IMF’s opinion on that? And the other question is on their flight, electricity, the price, reflective electricity tariffs. So we were under the impression that that is already happening because the government is already. Adjusting prices periodically, but in the press release that was released on Friday. The sort of insinuated that Sri Lanka S deviated. What is what is the situation there? Thank you.

Ms. Elnagar: Peter, we can take a couple more questions this round.

QUESTIONER: Randa, I hope I'm audible.

Ms. Elnagar: Yes you are.

QUESTIONER: Great. I just have one question. Peter, could you please outline what are the key goal posts that Sri Lanka has to hit as it moves forward to the 4th review now, right. And when will there be an IMF delegation coming to Colombo?
Thank you.

Ms. Elnagar: We can take more questions. There are two questions in the chat, Peter, One is asking, why was the proposed property tax under the IMF program withdrawn, and why wasn't the existing under taxed Council tax system rebased instead? How much revenue was expected from the input rental tax and why could this be? Couldn't this be raised adjusting Council taxes? There's another one we can take, or that's enough for now this round.

Mr. Breuer: Yeah. Why don't we get going with these ones? Thank you.

Ms. Elnagar:  Yeah, because Shehar already had a chance at the beginning, so let's take a different group now. Thank you.

Mr. Breuer: So thanks so much for these questions. On the size of the public sector, that's really not for us to judge the government needs to sort of identify the resources it needs to provide the services that it's expected to provide.
And do all of that within the envelope of the program. So there may be other institutions. The World Bank, for example, you know that can provide some more assistance, technical assistance to help with making the government as efficient as as possible. But. I don't really have a comment there. The electricity tariff.
So there was a reduction in the electricity tariffs in January, and this is when we feel that the cost reflective pricing was no longer met because on a forward-looking basis. That tariff cut meant that Ceb wouldn't be able to avoid any losses.
So these cuts. Essentially, at least on a forward-looking basis, implied that losses would be run now of course. These profits and losses by the electricity company depend on many factors, including the weather, the rain and so forth.
So what turns out ex post may be different from what happens ex ante, but this is a concern that we have because it could mean that that starts building up again in the electricity company. That could ultimately become a contingent liability for the government. This is something that, of course, Sri Lanka has experienced before, and avoiding this and making sure that consumers on average pay for how much it costs to generate and distribute the electricity is an important part of the program.

And this actually also goes towards answering the question of what are some of the main goal posts for the 4th review. So ensuring that cost reflective energy pricing is restored is of course a key. Part of what we would like to see for the next.
Review I should say there are some mechanisms that give us hope that this will happen automatically. The SD bulk supply transaction account, which is sort of a mechanism that is supposed to kick in when losses at CB become too large when they are cash balances become. You know, negative beyond a certain value.
Then there's meant to be an automatic increase in the tariff. That would prevent these losses from accumulating, so so they are already mechanisms in place.
It's important that these mechanisms be allowed to function, and then, of course, at the next tariff setting, it's important to ensure that tariffs will once again be set to  cover the costs. Another important Issue for the next review will of course be.
The budget that the budget that is finally passed at the end of this month is in fact consistent with the program parameters. So this is something that we will be watching very carefully. So those are two issues that may matter.

The next mission we expect to be visiting Colombo.in the coming weeks or months or so. So the exact dates will be announced closer to the time.
With respect to the property tax. That is a property tax. Is very common in many countries it is a form of wealth tax whereby those who have more wealth, meaning more expensive homes, larger homes that are worth more, need to make larger contributions to the tax coffers and support the government. So, now it's it had been discussed for quite some time previously, and in fact many preparations have been made under this program for property tax with respect to, you know sales price and rents register, and various databases to estimate the values of homes. So lots of preparations have been have been made. Then there were some concerns and this goes towards the question with respect to the local authorities how this tax could be raised and how it could be shared with at the at the central government level. So some of these issues still need to be resolved and so this is this is something I think that is as yet you know to be addressed. Let me stop there. Thank you.

Ms. Elnagar:  Peter, we can take a couple more questions because we are out of time. So we can take from Sisira, who has been waiting patiently, and then we have a couple of questions in the chat. So Sisira, please go ahead. We can't hear you.
Sisira do you have a question? You have your hand raised?

QUESTIONER: Yeah. Can you hear me?

Elnagar, Randa Mohamed: Yes.

QUESTIONER:  My question is, what is the impact?

Ms. Elnagar: Your mic is a bit muffled.

QUESTIONER: Can you hear me?

Ms. Elnagar: Peter, can you hear him?

Mr. Breuer: It's very, very soft. I don't know whether you can bring the mic closer to him.

QUESTIONER: Yeah, my question is what is the projected impact of Sri Lanka's foreign reserves?

Mr. Breuer: I think the question is what is the impact of the car imports on reserves? Yeah, OK.

Ms. Elnagar: Vehicle import. Yeah. And then we have a couple of questions here.
Amal already asked the question, a supplementary question regarding what Asantha raised about vehicle imports. So it's the same topic and then we have. One from Ishara. Even though the IMF program has put Sri Lanka's economy on the right track, a recent poverty study revealed that more than 50% of households are below the poverty line. Additionally, the Central bank mentioned that brain drain could severely impact efforts to accelerate growth. In this scenario, how can Sri Lanka reach its anticipated IMF recovery targets? And these are the last questions of the press conference.

Mr. Breuer::Yeah. Thank you very much. On the car imports. So yes, removing the import restrictions on car imports will allow cars to be imported which means they have to be paid for and so that could have an impact on the balance of payments. But as you know there's a question to what extent you know the Central bank should intervene to make those reserves available versus allowing the exchange rate to fluctuate in response to market forces. So, that is something that remains to be seen, but maybe just to highlight the fact that reserves have increased. Significantly, so far under the program they have reached about half of the program objective already, which is very impressive.

On the question with respect to the anticipated IMF recovery targets, so. I think it's quite clear that things really have turned around significantly in Sri Lanka. I mean, you all live there, so you experience it much more than us. But when I first got to Sri Lanka in June 2022. Everybody was standing in a line somewhere in, you know, to get fuel, to get cooking gas to get food or medications and economic activity was was very subdued, I think in real terms. Sri Lanka lost, you know, 10% or so of its economic activity. As a result of this crisis and since then in the short amount of time.
That the program has been there basically since 2023 it has already recovered 40% of the income it has lost. In the preceding five years, so in a very short amount of time, you have already a very significant recovery. You have the most recent growth number of 5.5%.

So I think things are turning around significantly in Sri Lanka and that will have an impact on the indicators that we care about, such as poverty, so.
As economic opportunities return to Sri Lanka. Incomes will increase and poverty will be reduced, and also it'll be more attractive to remain in Sri Lanka and not leave and emigrate or those who have emigrated may find opportunities back in in Sri Lanka again so. You know, as you look at our projections, we have increased these quite a bit. For 2025 and beyond and so based on these, I would say I'm quite optimistic about the recovery in Sri Lanka.

Ms. Elnagar: I think we're out of time, Peter. If you guys have any further questions, please, please feel free to send them by e-mail. We are always very responsive or via WhatsApp. With that I would like to thank our speakers Peter, Katia, and Martha, and I would like to thank you all for participating in this press conference.
We're going to be posting the recording and the transcript by tomorrow.
And we look forward in seeing to seeing you again in the future.
Thank you very much.

Mr. Breuer:  Thank you.

Ms. Woldemichael: Thank you.

Ms. Svirydzenka: Thank you.