By Hiran H. Senewiratne
The International Monetary Fund said it had reached an agreement with Sri Lanka for an extended financing facility of US$2.9 billion over 4 years, subject to debt restructuring and prior actions. Under the program, the Sri Lankan budget will have to generate a primary surplus (debt before interest) of 2.3% by 2024. The projected primary deficit for 2022 is 4% of GDP, the high-level mission said. IMF level headed by Peter Breuer.
“These reforms include making personal income tax more progressive and broadening the tax base for corporation tax and VAT. The program aims to achieve a primary surplus of 2.3% of GDP by 2024, Breuer told a news conference at the Central Bank’s headquarters in Colombo yesterday. Breuer, Masahiro Nozaki and other members of the IMF delegation visited Sri Lanka from August 24 to September 1 to continue discussions on IMF support to Sri Lanka and the local authorities’ comprehensive economic reform program.
Breuer added: “The 2022 primary deficit has been projected by the government at -4.0% of GDP.” Sri Lanka will also have to negotiate with its creditors to restructure its debt.
“The arrangement is subject to IMF management and Executive Board approval in the coming period, subject to the authorities implementing prior actions and obtaining assurances from financing from official creditors of Sri Lanka and a good faith effort to reach a collaborative agreement with private creditors.
“Debt relief from Sri Lanka’s creditors and additional financing from multilateral partners will be needed to help ensure debt sustainability and close financing gaps.
“The Central Bank will also have to stop printing money (monetary financing) and lower inflation.”
The full IMF statement is reproduced below:
“The Sri Lankan authorities and the IMF team have reached a staff-level agreement to support the authorities’ economic adjustment and reform policies with a new 48-month Extended Credit Facility (EFF) with access requested of about 2.2 billion SDR (equivalent to the US dollar. 2.9 billion dollars).
“The new EFF arrangement will support Sri Lanka’s agenda to restore macroeconomic stability and debt sustainability, while preserving financial stability, reducing vulnerabilities to corruption and unlocking Sri Lanka’s growth potential.
“The arrangement is subject to approval by IMF management and the Executive Board in the coming period, subject to the authorities implementing prior actions, obtaining assurances from financing from official creditors of Sri Lanka and a good faith willingness to reach an agreement collaborative agreement with private creditors Debt relief from Sri Lanka’s creditors and additional financing from multilateral partners will be needed to help ensuring debt sustainability and closing financing gaps.
“Sri Lanka is facing an acute crisis. Vulnerabilities have increased due to insufficient external reserves and unsustainable public debt dynamics. The April debt moratorium led Sri Lanka to default on its external obligations, and an extremely low level of foreign exchange reserves hampered the import of essential goods, including fuel, further hampering economic activity. The economy is expected to contract by 8.7% in 2022 and inflation recently exceeded 60%. The impact has been borne disproportionately by the poor and vulnerable.
“In this context, the authorities’ programme, supported by the Fund, would aim to stabilize the economy, protect the livelihoods of the Sri Lankan people and prepare the ground for economic recovery and the promotion of sustainable growth. and inclusive.
The key elements of the program are:
Increase tax revenue to support fiscal consolidation. Starting from one of the lowest revenue levels in the world, the program will implement major tax reforms. These reforms include making personal income tax more progressive and broadening the tax base for corporation tax and VAT. The program aims to achieve a primary surplus of 2.3% of GDP by 2024.
Introduce cost-recovery pricing for fuel and electricity to minimize fiscal risks from state-owned enterprises. The team welcomed the significant revenue measures and energy price reforms already announced by the authorities;
Mitigate the impact of the current crisis on the poor and vulnerable by increasing social spending and improving the coverage and targeting of social safety net programs;
Restoring price stability through data-driven monetary policy action, fiscal consolidation, phasing out monetary financing, and greater central bank autonomy that allow a flexible targeting regime to continue of inflation. A new Central Bank law is the cornerstone of this strategy;
Rebuild foreign exchange reserves by restoring a flexible, market-determined exchange rate, supported by the comprehensive program package;
Preserve financial stability by ensuring a sound and adequately capitalized banking system, and improving financial sector safety nets and regulatory standards with a revised banking law; and Reduce vulnerabilities to corruption by improving budget transparency and public financial management, introducing a stronger anti-corruption legal framework, and conducting an in-depth governance diagnostic, supported by IMF technical assistance.
The IMF team met with President and Finance Minister Ranil Wickremesinghe, Prime Minister Dinesh Gunawardena, Central Bank of Sri Lanka Governor Dr. P. Nandalal Weerasinghe, Treasury Secretary KM Mahinda Siriwardana, and other senior government and CBSL officials. She also met parliamentarians, representatives of the private sector, civil society organizations and development partners.