IMF Reaches Staff-Level Agreement on the Second Review of Sri Lanka’s Extended Fund Facility

The IMF team reached staff-level agreement with the Sri Lankan authorities on the second review under the economic reform program supported by a 4-year Extended Fund Facility (EFF) arrangementand concluded the 2024 Article IV Consultation discussions.

IMF noted that IMF Senior Mission Chief Peter Breuer and Deputy Mission Chief Ms. Katsiaryna Svirydzenka held constructive discussions in Colombo.

The EFF arrangement was approved by the IMF Executive Board for a total amount of SDR 2.3 billion (about US$3 billion) on March 20, 2023.

The staff-level agreement is subject to the approval by IMF management and the IMF Executive Board in the period ahead, contingent on: (i) the implementation by the authorities of prior actions; (ii) the completion of financing assurances review, which will focus on confirming multilateral partners’ committed financing contributions and whether adequate progress has been made with the debt restructuring to give confidence that the restructuring will be concluded in a timely manner and in line with the program’s debt targets.

Upon completion of the Executive Board review, Sri Lanka would have access to SDR 254 million (about US$337 million), bringing the total IMF financial support disbursed under the arrangement to SDR 762 million (about US$1 billion).

“The authorities are making good progress in implementing an ambitious reform agenda under the EFF with commendable outcomes, including rapid disinflation, robust reserve accumulation, and initial signs of economic growth while preserving the stability of the financial system. Public finances have strengthened following substantial fiscal reforms. Program performance was strong, with all quantitative performance criteria and indicative targets for end-December 2023 met except for the indicative target on social spending. Most structural benchmarks due before end-February 2024 were either met or implemented with delay. Reforms in some areas are still ongoing.

“The economic situation is gradually improving. Growth turned positive after six consecutive quarters of contraction, registering 1.6 percent and 4.5 percent y-o-y growth in the third and fourth quarters of 2023 respectively. High-frequency economic indicators point to a continued pick-up in manufacturing, construction, and services. Inflation has come down from a peak of 70 percent in September 2022 to 5.9 percent in February 2024. Gross official reserves increased to US$4.5 billion at end-February 2024 with sizeable foreign exchange purchases by the central bank,” IMF said.

IMF stresed that sustaining the reform momentum is critical to put the economy on a path towards lasting recovery and stable and inclusive economic growth.

” We welcome the authorities’ commitment to fiscal reforms. Continued progress towards the introduction of the property tax is critical, together with revenue measures to meet the revenue mobilization goals in 2025 and beyond. Revenue administration and anti-corruption efforts to boost tax collections are also key. Maintaining cost recovery in fuel and electricity pricing will help minimize fiscal risks arising from state-owned enterprises,” it noted/

While inflation has decelerated faster than expected, IMF remarked that continued monitoring is warranted to help anchor inflationary pressures and support macroeconomic stability. Against ongoing  external uncertainty, it also remains important to continue to rebuild external buffers through strong reserves accumulation.

Sri Lanka’s Agreements in principle with the Official Creditor Committee and Export-Import Bank of China on debt treatments consistent with program parameters were important milestones putting Sri Lanka’s debt on the path towards sustainability, according to the statement.

“The critical next steps are to  finalize the agreements with the official creditors and reach Agreements in Principle with the main external private creditors in line with program parameters in a timely manner. This should help restore Sri Lanka’s debt sustainability over the medium term,” it added.

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