IMF Approves $337 Million for Sri Lanka as First Review Under Rescue Package Passes

Colombo: The International Monetary Fund (IMF) has approved the first review of Sri Lanka's 48-month Extended Fund Facility (EFF) arrangement, marking a significant step in the country's journey towards economic recovery. This decision enables an immediate disbursement of approximately US$337 million, increasing the total IMF financial support for Sri Lanka to about US$670 million​.

Signs of Economic Stabilization

Sri Lanka's economy, which plunged into its worst financial crisis since independence in 1948, is now showing signs of stabilization. The crisis, characterized by soaring inflation, currency depreciation, and depleted foreign reserves, began to improve after securing the bailout in March. A staff-level agreement on the first review was reached in October, but the board's approval was pending until agreements were made with bilateral creditors to restructure some foreign debt​.

IMF's Observations and Recommendations

The IMF has noted that Sri Lanka's macroeconomic policy reforms are yielding positive results, with the economy demonstrating initial signs of stabilization. This includes rapid disinflation, significant fiscal adjustment based on revenue, and a build-up of reserves. However, the country did not meet all the quantitative performance criteria, particularly regarding expenditure arrears and tax revenues. The IMF emphasized the importance of continued commitment to governance improvements, including addressing corruption, and the timely implementation of a Governance Diagnostic Report's recommendations to achieve tangible economic gains for all citizens.

Debt Sustainability and Future Directions

Sri Lanka's agreements with the Official Creditors Committee and the Export-Import Bank of China are seen as pivotal in steering the nation's debt towards sustainability. The IMF stresses the importance of swiftly completing and signing Memoranda of Understanding with official creditors and reaching resolutions with external private creditors on comparable terms. For a full and speedy recovery, sustaining reform momentum and strong ownership of reforms are crucial. Key priorities include revenue mobilization, aligning energy pricing with costs, strengthening social safety nets, rebuilding external buffers, safeguarding financial stability, and enhancing governance. Additionally, the Central Bank of Sri Lanka is advised to continue its multi-pronged disinflation strategy and focus on accumulating reserves.

Following the Executive Board discussion on Sri Lanka, Mr. Kenji Okamura, Deputy Managing Director, issued the following statement:

"Macroeconomic policy reforms are starting to bear fruit and the economy is showing tentative signs of stabilization, with rapid disinflation, significant revenue-based fiscal adjustment, and reserves build-up."

Performance under the EFF-supported program has been satisfactory. All quantitative performance criteria for end-June were met, except the one on expenditure arrears. All indicative targets were met, except the one on tax revenues. Most structural benchmarks were either met or implemented with delay by end-October 2023. The publication of a Governance Diagnostic Report, the first in Asia and a structural benchmark under the program, is a commendable first step towards addressing deep-rooted corruption weaknesses. Continued commitment to improving governance and timely implementation of the report’s recommendations can deliver tangible economic gains to all citizens.

Sri Lanka’s agreements-in-principle with the Official Creditors Committee and Export-Import Bank of China on debt treatments are consistent with the EFF targets. They are an important milestone putting Sri Lanka’s debt on the path towards sustainability. A swift completion and signature of the Memoranda of Understanding with the official creditors is important. Timely implementation of the agreements, together with reaching a resolution with external private creditors on comparable terms, should help restore Sri Lanka’s debt sustainability over the medium term.

To ensure a full and swift recovery, sustaining the reform momentum and strong ownership of reforms is of paramount importance. Key priorities include advancing revenue mobilization, aligning energy pricing with costs, strengthening social safety nets, rebuilding external buffers, safeguarding financial stability, eradicating corruption, and enhancing governance.

Reinforcing the revenue-based fiscal consolidation supported by revenue administration reforms is critical to recover from program slippages and promote a break from past policy shortcomings.

The Central Bank of Sri Lanka should continue to focus on the multi-pronged disinflation strategy to safeguard the credibility of its inflation targeting regime. Accumulating reserves, supported by exchange rate flexibility, remains an important priority under the EFF.

Implementing the bank recapitalization plan and strengthening financial supervision and crisis management framework are crucial to safeguard financial sector stability.

Further strengthening the social safety net and protecting social spending remains critical to safeguarding the poor and vulnerable.’

press release:
IMF Executive Board Completes First Review Under EFF Arrangement for Sri Lanka