IMF says time for all Lankans to unite to usher sustainable growth

The IMF on Monday said that its supported program is an opportunity for all Sri Lankans to come together and put the country on a sustainable growth path. 

“The IMF supported program is an opportunity for all Sri Lankans to come together and resolve this crisis and restore economic stability and put the country on a sustainable growth path,” said IMF’s Senior Mission Chief for Sri Lanka Peter Breuer during a briefing out of Washington DC to the media on Monday following the $ 2.9 billion four-year Extended Fund Facility support from the multilateral donor. 

He said Sri Lanka has been facing a severe economic crisis as a result of past policy missteps and economic shocks. “We have been deeply concerned about the impact of the crisis on the Sri Lankan people, particularly the poor and vulnerable groups, and about the economic costs of the delay in the country’s access to external financing,” Breuer said. 

It was pointed out that the Monday’s IMF Executive Board approval marked an important step towards the resolution of the crisis with Sri Lanka immediately receiving an initial disbursement of about $ 330 million from the EFF arrangement, which is expected to catalyse new external financing including from the Asian Development Bank and the World Bank.

He said the reform program supported under the EFF arrangement is built on strong policy measures and prioritises: 

(i) An ambitious revenue-based fiscal consolidation, accompanied by stronger social safety nets, fiscal institutional reforms, and cost-recovery based energy pricing to ensure the state’s ability to support all its essential expenditures

(ii) Restoration of public debt sustainability, including through a debt restructuring to ensure stable financing of the government’s operations

(iii) A multi-pronged strategy to restore price stability and rebuild reserves under greater exchange rate flexibility in order to alleviate the burden of inflation, particularly on the poor, to foster an environment of investment and growth, and to ensure Sri Lanka's ability to purchase essential goods from abroad

(iv) Policies to safeguard financial sector stability to ensure that the financial sector can play its key role in supporting economic growth

(v) Structural reforms to address corruption vulnerabilities and enhance growth.

“Commendably, Sri Lanka has already started implementing these challenging policy actions. It is now essential to continue the reform momentum under strong ownership by the authorities and the Sri Lankan people more broadly,” Breuer said. 

He pointed out that the economic impact of the reforms on the poor and vulnerable needs to be mitigated with appropriate measures. “In this regard, we welcome the authorities’ firm commitment to strengthen social safety nets, including through a minimum spending floor, well-targeted spending through a new Social Registry, and establishment of objective eligibility criteria. Tax reforms under the program are designed to be progressive, that is, ensuring greater contributions from high-income earners. Efforts to increase tax revenues should be pursued in a growth-friendly manner while protecting the poor and most vulnerable,” he added, 

It was revealed that Sri Lanka’s public debt, at 128% of GDP as of end-2022, is unsustainable. The country is in arrears to all its external creditors. IMF Board approval of assistance to Sri Lanka required assurances from official bilateral creditors that they will provide debt relief and/or financing to restore debt sustainability consistent with the program, as well as an assessment that the authorities are making good faith efforts to reach a collaborative agreement with private creditors. These requirements were met ahead of the Board meeting.

“It is now important for the Sri Lankan authorities and creditors to closely coordinate and make swift progress towards a debt treatment that restores debt sustainability under the EFF-supported program. The President’s recent open letter to official bilateral creditors includes commitments to transparency and comparability of treatment for all external creditors, which should help facilitate this process. IMF staff will continue to assist the authorities with creditor coordination in line with the IMF’s policies,” Breuer said. 

IMF said specific and credible financing assurances have been obtained from Paris Club creditors, India, Hungary and the Export-Import Bank of China. Consent to IMF financing notwithstanding Sri Lanka’s arrears was obtained from the remaining Chinese official bilateral creditors, Iran, Kuwait, Pakistan and Saudi Arabia. This demonstrated the support and determination by all of Sri Lanka’s official bilateral creditors.