October 1, 2022
IMF calls for quicker deal by creditors to prevent Sri Lanka crisis worsening- BPN TODAY

IMF calls for quicker deal by creditors to prevent Sri Lanka crisis worsening

  • Says Staff-Level Agreement reached for 4-year Extended Fund Facility worth $ 2.9 b should reassure creditors SL on a serious reforms path and help expedite negotiations for relief on $ 48 b worth external debt default
  • Refuses to give a timeline on release of funds as IMF Board approval is contingent on the implementation of prior actions, and on receiving financing assurances from official creditors and relief from private creditors
  • Opines no agreement by creditors will deepen the economic crisis to a humanitarian one and undermine Sri Lanka’s future repayment capacity
  • Stresses it is in interest of all creditors to coordinate faster with transparent collaboration to help Sri Lanka emerge from crisis and get back to a path of prosperity and debt sustainability
  • Forecasts Sri Lanka’s economy to contract by 8.7% this year
  • Flags off crisis impact has been disproportionately borne by the poor and vulnerable

The International Monetary Fund (IMF) yesterday called for quicker agreement by creditors on relief to ensure the crisis in Sri Lanka doesn’t worsen to a humanitarian one.

The appeal follows the IMF and the Government reaching a Staff-Level Agreement (SLA) for a 48-month (four years) Extended Fund Facility (EFF) worth $ 2.9 billion.

Debt relief from creditors is a critical condition for the IMF Executive Board to approve the program and release funds since Sri Lanka suspended servicing of external debt worth $ 47 billion from 12 April and is classified as a default sovereign facing serious debt sustainability issues.

“Debt relief is important for Sri Lanka’s debt sustainability. If there is no agreement by creditors it will deepen the crisis and undermine Sri Lanka’s future repayment capacity. Therefore, it is in the interest of all creditors to coordinate faster with transparent collaboration to help Sri Lanka,” IMF staff mission Co-Lead Peter Breuer told journalists yesterday.

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Key elements of the program are:

•Raising fiscal 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 corporate income tax and VAT. The program aims to reach a primary surplus of 2.3% of GDP by 2025

•Introducing cost-recovery based pricing for fuel and electricity to minimise fiscal risks arising from State-owned enterprises. The team welcomed the authorities already announced substantial revenue measures and energy pricing reforms

•Mitigating the impact of the current crisis on the poor and vulnerable by raising 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 stronger central bank autonomy that allow pursuing a flexible inflation targeting regime. A new Central Bank Act is a cornerstone of this strategy

•Rebuilding foreign reserves through restoring a market-determined and flexible exchange rate, supported by the comprehensive policy package under the program

•Safeguarding financial stability by ensuring a healthy and adequately capitalised banking system, and by upgrading financial sector safety nets and regulatory standards with a revised Banking Act 

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•Reducing corruption vulnerabilities through improving fiscal 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 held meetings with President and Finance Minister Ranil Wickremesinghe, Prime Minister Dinesh Gunawardena, 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. It also met with Parliamentarians, representatives from the private sector, civil society organisations and development partners.

“We would like to thank the authorities for their candid approach and warm hospitality and are looking forward to continuing our engagement in support of Sri Lanka and its people,” the statement added.

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