IMF finalizes first review of Sri Lanka’s bailout package

The International Monetary Fund (IMF) says its Executive Board on Tuesday (Dec.12) completed the first review under the 48-month Extended Fund Facility (EFF) arrangement for Sri Lanka.

The completion of the first review paves the way for an immediate disbursement of the much-anticipated second tranche of the IMF loan which amounts to SDR 254 million (approximately USD 337 million). This will bring the total IMF financial support disbursed thus far to SDR 508 million (approximately USD 670 million).

The total amount of Sri Lanka’s EFF Arrangement is SDR 2.286 billion (about USD 3 billion) as of the time of program approval on March 20, 2023.

In a statement issued following the Executive Board’s meeting, IMF’s Deputy Managing Director Kenji Okamura commended Sri Lanka’s performance under the EFF-supported program, saying that it 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.”

Sri Lanka plunged into its worst financial crisis in seven decades last year after its foreign exchange reserves dwindled to record lows. But since locking down the IMF bailout of USD 2.9 billion in March 2023, the island nation has managed to partly stabilise its economy, bring down runaway inflation and rebuild currency reserves.

The EFF program supports Sri Lanka’s efforts to restore macroeconomic stability and debt sustainability, safeguard financial stability, and enhance growth-oriented structural reforms.

Meanwhile, Sri Lanka has reached in-principle deals with the Export-Import (Exim) Bank of China, its largest bilateral creditor, and the Official Creditor Committee (OCC) to restructure its debts.

On November 29, the Sri Lankan government and the OCC revealed that they had reached an agreement in principle on the financial terms of debt treatment. The in-principle deal covers approximately USD 5.9 billion of outstanding public debt and consists of a mix of long-term maturity extension and reduction in interest rates.

The deal between OCC and Sri Lanka came about a month after the island nation’s agreement with China’s Exim Bank covering about USD 4.2 billion of outstanding debt.

In his statement, Mr. Okamura said Sri Lanka’s in-principle agreements with the OCC and China’s Exim Bank on debt treatments are consistent with the EFF targets. “They are an important milestone putting Sri Lanka’s debt on the path towards sustainability.”

He noted that a swift completion and signature of the agreement with the official creditors is of importance.

Mr. Okamura also highlighted that sustaining the reform momentum and strong ownership of reforms is imperative to ensure a full and swift recovery.

The full statement issued by Mr. Kenji Okamura, Deputy Managing Director, is as follows:

“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.”