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Staff-level agreement with IMF on $ 2.9 bn, four-year EFF

02 Sep 2022

  • IMF says objectives concern macroeconomic stability, debt sustainability, protecting vulnerable, structural reforms to address corruption, unlocking growth potential
  • Notes additional financing from multilateral partners needed to close financing gaps, econ to contract by 8.7%, says impact disproportionately borne by poor and vulnerable
  The International Monetary Fund (IMF) and the Government of Sri Lanka have reached a staff-level agreement on a 48-month long arrangement under an Extended Fund Facility (EFF) of $ 2.9 billion. The IMF mission, led by IMF Monetary and Capital Market Department Debt Capital Markets Division Chief Peter Breuer, and IMF Fiscal Affairs Department Senior Economist Masahiro Nozaki, which visited Colombo from 24 August to continue discussions on IMF support for Sri Lanka and the authorities’ comprehensive economic reform programme, stated that a staff-level agreement has been reached to support Sri Lanka's economic policies with a 48-month arrangement under an EFF of $ 2.9 billion. Speaking at a media briefing at the Central Bank of Sri Lanka (CBSL) yesterday (1), Breuer said that the objectives of the proposed programme are to restore macroeconomic stability and debt sustainability, while safeguarding financial stability, protecting the vulnerable, and stepping up structural reforms in order to address corruption-related vulnerabilities and unlock Sri Lanka’s growth potential. “Financing related assurances to restore debt sustainability from Sri Lanka’s official creditors and making a good faith effort to reach a collaborative agreement with private creditors are crucial before the IMF can provide financial support to Sri Lanka. Debt relief from Sri Lanka’s creditors and additional financing from multilateral partners will be required in order to help ensure debt sustainability and to close financing gaps,” he added. He said that the agreement is subject to approval by the IMF Management and the Executive Board in the period ahead, contingent on the implementation by the authorities of prior actions, and on receiving financing related assurances from Sri Lanka’s official creditors and making a good faith effort to reach a collaborative agreement with private creditors. “Sri Lanka has been facing an acute crisis. Vulnerabilities have grown owing to inadequate external buffers and an unsustainable public debt dynamic. The April debt moratorium led to Sri Lanka defaulting on its external obligations, and a critically low level of foreign reserves has hampered the import of essential goods, including fuel, thus further impeding economic activity. The economy is expected to contract by 8.7% in 2022 and inflation recently exceeded 60%. The impact has been disproportionately borne by the poor and vulnerable,” a statement from the IMF read. According to the IMF, the key elements of the programme include raising fiscal revenue to support fiscal consolidation through major tax reforms, introducing cost recovery based pricing for fuel and electricity in order to minimise the fiscal risks arising from State owned enterprises, restoring price stability through data driven monetary policy action, phasing out monetary financing and having stronger Central Bank of Sri Lanka (CBSL) autonomy that allows pursuing a flexible inflation targeting regime, rebuilding foreign reserves through restoring a market determined and flexible exchange rate, safeguarding financial stability by ensuring a healthy and adequately capitalised banking system, upgrading financial sector safety nets and the regulatory standards with a revised Banking Act, and reducing corruption vulnerabilities through improved fiscal transparency and public financial management, and through the introduction of a stronger legal framework, and an in-depth governance diagnostic, supported by IMF technical assistance. The IMF stated that its team visiting Sri Lanka has welcomed the authorities’ already announced substantial revenue related 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 programmes. The IMF team held meetings with President and Minister of Finance, Economic Stabilisation, and National Policies Ranil Wickremesinghe, Prime Minister Dinesh Gunawardena, CBSL 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, and representatives from the private sector and civil society organisations.


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