IMF calls for swift measures to achieve debt sustainability, regain investor confidence

• Following the conclusion of a visit by staff mission, IMF says knife-edged recovery still at critical juncture 
• Sustaining reform momentum and ensuring timely implementation of commitments critical to cement hard-won economic progress
• Says maintaining macroeconomic stability, restoring debt sustainability require further efforts to raise revenues
• Opines 2025 Budget needs to be underpinned by appropriate revenue measures; continued spending restraint to reach medium-term primary balance objective of 2.3% of GDP
• States relaxation of import restrictions on motor vehicles will support revenue mobilisation in 2025
• Notes tax administration reforms could further improve compliance, including by establishing a properly functioning VAT refund system for exporters by April 2025
• Insists avoiding new tax exemptions will not only reduce corruption risks and fiscal revenue leakages, but also ensure predictable and transparent tax system
• Asserts economic reform program implemented is yielding commendable outcome
• Progress of SL in meeting key commitments under the IMF-supported program will be formally assessed in the context of the third review of EFF arrangement

The International Monetary Fund (IMF) yesterday acknowledged that Sri Lanka has made commendable progress in putting debt on a path towards sustainability but urged for a swift resolution of the remaining steps to achieve debt sustainability and regain investor confidence.

The observation by the IMF was following the conclusion of a visit by IMF Staff mission led by Senior Mission Chief Peter Breuer.

In a statement the IMF noted that maintaining macroeconomic stability and restoring debt sustainability require further efforts to raise fiscal revenues. 

It added that the 2025 Budget needs to be underpinned by appropriate revenue measures and continued spending restraint to reach the medium-term primary balance objective of 2.3% of GDP, a key requirement for restoring Sri Lanka’s debt sustainability.

The IMF team visited Sri Lanka from 25 July to 2 August, to discuss recent macroeconomic developments and progress in implementing economic and financial policies under the authorities’ economic reform program supported by the IMF’s Extended Fund Facility (EFF) arrangement.

Below is the full statement:

“The economic reform program implemented by the Sri Lankan authorities is yielding commendable outcome. The recovery continues with real GDP posting three consecutive quarters of expansion, and growth accelerating to 5.3% year-on-year in the first quarter of 2024. Inflation remains below the Central Bank of Sri Lanka’s (CBSL) 5% target and domestic borrowing rates have declined. Gross international reserves increased by $ 1.2 billion during the first half of 2024 and reached $ 5.6 billion. Fiscal revenue collections increased during the same period. Going forward, these improvements need to translate into better living conditions for all of Sri Lanka’s people. 

With Sri Lanka’s knife-edged recovery at a critical juncture, sustaining the reform momentum and ensuring timely implementation of all program commitments are critical to cement the hard-won economic progress to date and put the economy on a firm footing. Maintaining macroeconomic stability and restoring debt sustainability require further efforts to raise fiscal revenues. The 2025 Budget needs to be underpinned by appropriate revenue measures and continued spending restraint so as to reach the medium-term primary balance objective of 2.3% of GDP — a key requirement for restoring Sri Lanka’s debt sustainability. The planned relaxation of import restrictions on motor vehicles will support revenue mobilisation in 2025.

Tax administration reforms could further improve compliance, including by establishing a properly functioning VAT refund system for exporters by April 2025. Any proposed measure eroding the fiscal position needs to be offset by compensating measures of high quality.”

Avoiding new tax exemptions will not only reduce corruption risks and fiscal revenue leakages, but also ensure a more predictable and transparent tax system. Continuing to maintain energy prices at cost-recovery levels is critical to avoid potential fiscal costs. Protecting the poor and the vulnerable through improved targeting and better coverage of cash transfers remains critical. Policy slippages could jeopardise the recovery.

The recent Parliamentary approval of two key pieces of legislation — the Public Financial Management Act and the Public Debt Management Act — is a milestone that will improve fiscal discipline and prudent debt management, bolstering transparency and accountability. Developing a holistic debt management strategy and establishing a well-structured and integrated Public Debt Management Office will help lower the government’s financing risks.

Inflation has been well-contained. Monetary policy should remain prudent and prioritise the anchoring of inflation expectations. Maintaining price stability also hinges on safeguarding CBSL’s independence. Continued reserve accumulation and exchange rate flexibility remain key priorities.  

The recent amendments to the Banking Act and the related implementing regulations will help safeguard financial stability. To allow the financial sector to contribute to economic growth, the authorities need to ensure the banking sector is adequately capitalised.

The recently formulated National Anti-corruption Agenda, building on the authorities’ earlier governance action plan, is a welcome step. A steadfast implementation of governance reforms outlined in the Governance Diagnostic Report, prioritising near-term commitments under the EFF program, is critical to addressing corruption risks and promoting a break from past policy missteps. Ensuring an enabling environment for governance reforms is key to bolstering public confidence and facilitating implementation of these important efforts. 

The authorities have made commendable progress with putting debt on a path towards sustainability. The execution of the domestic debt restructuring and finalising the agreements with the Official Creditor Committee and China EXIM Bank are major milestones. IMF staff assessed the ‘Joint Working Framework’ announced at the conclusion of the second round of restricted discussions with the bondholder committee and have provided this assessment to the authorities and, on their request, the financial advisors of the bondholders. We encourage a swift resolution of the remaining steps to achieve debt sustainability and regain investor confidence. We will continue to support Sri Lanka’s ongoing debt restructuring efforts.”

Progress in meeting key commitments under the IMF-supported program will be formally assessed in the context of the third review of the EFF. The timing of the third review will be discussed with the Government after the recently announced Presidential elections.

The IMF team held meetings with President and Finance Minister Ranil Wickremesinghe, Central Bank of Sri Lanka Governor Dr. P. Nandalal Weerasinghe, Secretary to the Treasury K.M. Mahinda Siriwardana, and other senior Government and CBSL officials. The IMF team also met with Parliamentarians, representatives from the private sector, civil society organisations, and development partners. 

“We would like to thank the authorities for the excellent collaboration during the mission and reaffirm our commitment to support Sri Lanka for a full and inclusive economic recovery.”