Sri Lanka makes progress towards IMF rescue package

• Virtual talks to continue towards reaching Staff-level agreement in the near term
• But says debt sustainability restoration would be required for Executive Board to approve bailout package
• Commends monetary and fiscal policy measures taken since April to address crisis 
• Hints at the need for more serious and deeper tax reforms to narrow fiscal deficit 
• Calls for tangible measures to reduce corruption hindering SL’s growth potential 

Concluding its visit to Colombo, the International Monetary Fund (IMF) Staff mission said yesterday that their talks with the Sri Lankan authorities achieved significant progress on the economic reform programme, but more talks would continue virtually before a much anticipated Staff-level agreement on an Extended Fund Facility (EFF) is reached. 

However, the Staff team in their parting remarks said a Staff-level agreement could be expected in the near term although they fell short of giving a specific time line. 

A Staff-level agreement is an essential prerequisite for any type of rescue package sought from the IMF. Before the staff team’s visit, Sri Lankan authorities were hopeful of entering into one within June itself. 

Following a Staff-level agreement, the IMF Executive Board should approve rescue package. But in Sri Lanka’s case “because public debt is assessed as unsustainable, Executive Board approval would require adequate financing assurances from Sri Lanka’s creditors that debt sustainability will be restored,” a statement from the Staff mission said.

Sri Lankan authorities are expecting around US$ 3.0 billion under a 3-year EFF, but there is still no guarantee of the exact size of the rescue package. Any bail-out money would be disbursed in multiple tranches. 

Sri Lanka’s economy has come to a standstill after it ran out of foreign currency to purchase fuel, which is essential to power rest of the economic activities. 

“Sri Lanka is going through a severe economic crisis. The economy is expected to contract significantly in 2022, while inflation is high and rising. The critically low level of foreign reserves has hampered the import of essential goods,” the Staff mission observed in their assessment.    

The IMF Staff mission said during their ten-day visit, they witnessed the pain and the hardships faced by the Sri Lankan people as a result of the economic crisis, specially the poor and the vulnerable, and reassured their, “commitment to support Sri Lanka at this difficult time in line with the IMF’s policies”. 

The Staff team led by Peter Breuer and Masahiro Nozaki were in Sri Lanka from June 20 to June 30 to discuss the IMF support for Sri Lanka and the authorities’ comprehensive economic reform programme. 

They met with multiple high ranking officials including the President, Prime Minister, Central Bank Governor, Secretary to the Ministry of Finance, parliamentarians, private sector representatives, civil society organisation and development partners. 

The IMF’s Deputy Director for Asia and Pacific Department Anne-Marie Gulde-Wolf also joined in the policy discussions. 

The team said steps taken from April onwards in the areas of monetary and fiscal tightening by way of increase in interest rates, market pricing of energy and utilities and raising taxes are important first steps in addressing the crisis.

But, the IMF appears to be expecting more to reduce the elevated fiscal deficit by way of further tax measures. 

“Discussions advanced substantially during the mission, including on the need to reduce the elevated fiscal deficit while ensuring adequate protection for the poor and vulnerable. Given the low level of revenues, far-reaching tax reforms are urgently needed to achieve these objectives,” the statement said. 

Sri Lanka in June restored the tax structure that prevailed under its previous EFF programme with IMF but the estimates showed only limited incremental revenues as the economy has completely collapsed.

Meanwhile, among the other structural reforms proposed by the IMF, they identified corruption as the key factor that impede Sri Lanka’s forward march. 

“Other challenges that need addressing include containing rising levels of inflation, addressing the severe balance of payments pressures, reducing corruption vulnerabilities and embarking on growth-enhancing reforms,”  the statement added.