The first Review Mission of the International Monetary Fund (IMF) was held in Sri Lanka from September 14-27, 2023, to assess the economic reform process initiated by the Government of Sri Lanka under the guidance of the IMF, to overcome the economic crisis. The Governance Diagnostics Assessment released by the IMF noted that “Sri Lankan economy is showing tentative signs of stabilisation and the people of Sri Lanka have shown remarkable resilience” in the last one year.[i] At the same time, the IMF also noted that the ‘progress made in restoring debt sustainability with the help of external creditors, domestic debt restructuring process, as well as agreements on various set of policies and reforms were not satisfactory’.[ii] The IMF team asked Sri Lanka to show adequate progress in negotiations with bilateral creditors in a timely manner. The gap in revenue generation and expenditure was also highlighted by the Review Mission. Due to the delay in implementing economic reforms as anticipated by the IMF, Sri Lanka could not secure the second tranche of $330 million under the Extended Fund Facility (EFF) arrangement for now.
In March 2023, the IMF approved nearly $3 billion bailout package, a forty-eight-month arrangement under the EFF. The bailout package was tied to Sri Lanka’s ability to implement various policy reforms/structural reforms as agreed upon through Staff Level Agreement between the IMF and the Government of Sri Lanka. The first tranche of $330 million was received by Sri Lanka in March this year. In return, Sri Lanka was asked to implement strong policy measures including, ‘revenue-based fiscal consolidation, restoration of public debt sustainability through debt restructuring, restoring price stability and rebuilding, initiating policies to safeguard financial sector stability and structural reforms to address corruption vulnerabilities and enhanced growth’.[iii]To address Sri Lanka’s unsustainable public debt that stood at128 percent of GDP (as of 2022), the IMF asked Sri Lanka to “get assurance from official creditors that they will provide debt relief and/or financing to restore debt sustainability”.[iv] The central pillar of the IMF’s support program remained the anti-corruption and governance reforms. Notably, Sri Lanka also became the first country in Asia to undergo a governance diagnostic exercise by the IMF.
IMF Conditions: Progress so far
In line with the IMF recommendations, the Government of Sri Lanka passed a new Anti-Corruption Act in July 2023 in Parliament that aimed at ‘preventing and eradicating bribery and corruption and enhancing transparency and accountability in public institutions.[v]Composition of the Bribery and Corruption Investigation Commission (BCIC) of Sri Lanka has also been changed to bring in more transparency. The Commission was established in 1994. Unlike the past legislation, the new Act has provided powers to the Parliament of Sri Lanka, to assess the performance of the Commission every four months[vi]. But the 16-point plan/directives set forth by the IMF, to address the deep-rooted corruption is not easy to implement as it includes reforms, such as ‘publication of all public procurement contracts above LK 1 billion, publishing asset declarations for senior officials by July 2024, establishing an online digital land registry and enacting a crime legislation by April 2024 for combating money laundering and illicit financial activities’, to name a few[vii]. So far only 12 out of 225 parliamentarians have disclosed their assets.[viii]
Sri Lanka is also working towards Tax Administration Modernisation Strategy as recommended by the IMF and the World Bank. According to the World Bank, Sri Lanka has one of the lowest tax-to-GDP ratios in the world, which is 7.3 percent.[ix] In November 2019, the government led by Gotabaya Rajapaksa implemented major tax cuts upsetting the revenue of the Government. By 2022, the Government lost nearly one million tax payers.[x] IMF asked the Government to raise the public revenue by 12 percent by the end of 2024 and work on its tax system. The Bank also noted that Sri Lanka’s tax system is characterised by “high tax burden on labour rather than capital incomes, an over-reliance on indirect taxes, and a weak administration with poor compliance outcomes”.[xi] However, the new income tax measures such as increase in professional tax from 12.5 percent to 36 percent met with resistance by professional groups such as doctors and university teachers.
Further, privatisation of State-Owned Enterprises (SOEs) is another important reform process, which is being undertaken by the Government to receive financial assistance from the IMF. Privatisation of SOEs is a hard task for the present Government, due to substantial reliance on public sector. The country has over 400 SOEs operating in several key sectors including power, energy, finance and insurance, water, aviation, health and education, etc.[xii] Some of the notable SOEs are Ceylon Electricity Board (CEB), Ceylon Petroleum Corporation (CPC), Sri Lanka Ports Authority, Sri Lankan Airlines, Sri Lanka Telecom and State Pharmaceuticals Corporation among others.[xiii] Service sector accounts for 47 percent of employment in Sri Lanka, followed by agriculture and industry.[xiv] The government has decided to go ahead with reforms of SOEs by setting up a State-owned Enterprise Restructuring Unit (SRU) in 2022. It has identified 52 SOEs including the national carrier ‘Sri Lankan Airlines, insurance and power utility enterprises run by the state that are in need of reforms’.[xv] Privatisation of SOEs, are strongly opposed by trade union groups and workers in the last two years.
As far as debt restructuring and sustainability is concerned, Sri Lanka has been actively engaging with its bilateral and international creditors to reach consensus on terms of debt restructuring. Sri Lanka announced default on $51 billion external debt in April 2022. Bilateral creditors such as India’s assurance to the IMF have helped in getting the required bailout package from the IMF in March this year. On 9th May 2023, seventeen countries formed an official Creditors Committee, with India, Japan and France as co-chairs to discuss the Sri Lankan request for a debt treatment. This was in pursuance of the debt restructuring talks launched by the co-chairs on 13 April 2023.
The President of Sri Lanka has assured transparency and comparability of treatment to all external creditors.[xvi]India has so far provided the maximum financial and humanitarian help in the last one year to the tune of nearly $4 billion. By the end of 2021, nearly $7.6 billion outstanding debt of Sri Lanka is owed to China and repayment is a big challenge for the Government. After his trip to China to participate in 7th China-South Asia Expo in Kunming in August 2023, the PM of Sri Lanka Dinesh Gunawardane said that, China is “willing to help Sri Lanka effectively address the challenges of financial debt”.[xvii] It seems China would want to engage with Sri Lanka at the bilateral level to tackle the debt issue. It offered a two-year debt moratorium at the beginning of this year. According to reports, a preliminary debt agreement of $4.2 billion has been reached between Sri Lanka and the Export and Import (EXIM) Bank of China in the last week of September 2023, but the terms of the agreement are not public.[xviii] This agreement with China EXIM Bank may facilitate the disbursement of the next tranche of IMF financing.[xix] Not just China, all the bilateral creditors of Sri Lanka will have to agree on fair terms and conditions of external debt restructuring and equal treatment. Given the expectations of each bilateral lender when it comes to debt treatment, getting all the donors to agree on a debt restructuring is going to be a complex task for the Sri Lankan Government. There is also the aspect of debt payment to other external players such as private bond holders, international financial institutions etc.
Along with external debt restructuring, the Government’s Domestic Debt Restructuring (DDR) program, as a solution to addressing country’s debt stock has drawn wide criticism from various quarters. A particular reference can be made to targeting of Employees’ Provident Fund (EPF) and Employees’ Trust Fund (ETF) through DDR, which has been enforced since September 2023. Many believe that this would adversely impact the lifelong savings of common people[xx]. These measures are passed through Parliament dominated by the Sri Lanka Podujana Perumuna (SLPP), a party that is largely seen as responsible for the crisis in Sri Lanka.
What is at Stake for Sri Lanka?
Sri Lanka is yet to recover from the economic crisis that had hit the nation in May 2022. Help extended by international actors including bilateral and multilateral partners, was crucial in providing essential services to the people in the last one year. Inflation now is at single digit, down from 70 percent in September 2022 to below 2 percent in September 2023.[xxi] Foreign reserves have also increased to $2.4 billion by end July 2023.[xxii] But these developments may not be enough to guarantee a sustainable economic recovery and growth for Sri Lanka.
Sri Lanka is yet to finalise concrete terms and conditions for external debt restructuring, which is a crucial step towards obtaining the second tranche of bailout package from the IMF. Sri Lanka is dependent on its bilateral creditors in more than one way. Apart from continuation of negotiations on debt restructuring, Sri Lanka is trying to enhance cooperation in various sectors. For instance, dependence on tourism for revenue and limited export basket of the country is an issue the Government is trying to address to increase its revenue. From January to August 2023, the country’s overall merchandise exports decreased by 10.42 percent to US$ 7,983.13 million compared to the corresponding period of 2022 (US $ 8912.12)[xxiii].Of particular concern is the decrease of exports to the US, the largest export market of Sri Lanka. From January to August of 2023, exports to the US decreased by 18.89 percent (US$ 1872.7 million) when compared to the same period in 2022 (US$ 2308.75).[xxiv]According to the World Bank, ‘the economy contracted by 7.8 percent in 2022 and 7.9 percent in the first half of 2023’.[xxv]
Limited economic opportunities, tax burden and political uncertainty are some of the issues which are pushing the general population to look for better opportunities outside Sri Lanka. It is facing a large exodus of professionals. In 2023 alone, more than 200,000 professionals have applied to leave the country for better prospects.[xxvi] The IMF’s Governance Diagnostic Assessment also noted the severe social, economic and governance challenges faced by the country. Social tensions remain high due to falling real incomes. The ‘high cost of living and continued shortages of essentials, strong-arm measures against protestors and the postponement of local government elections are listed as sources of popular discontent’.[xxvii]
The IMF supported reform process is going to hit the social sector hard, as they require constraining public spending on crucial social sectors including healthcare, education, and infrastructure. The delay in addressing the root causes of the crisis related to governance and political instability may also delay further financial aid. What is adding to the economic crisis are the long-standing difficult political issues such as equal representation of all communities in the decision-making process and post war reconciliation, in Sri Lanka.
*Dr. Samatha Mallempati, Research Fellow, Indian Council of World Affairs (ICWA)
Disclaimer: Views expressed are personal.
[i] International Monitory Fund, “MF Staff Concludes Visit to Sri Lanka”, 27 September 2023, https://www.imf.org/en/News/Articles/2023/09/27/pr23326-imf-staff-concludes-visit-to-sri-lanka. Accessed on September 28, 2023.
[ii] International Monitory Fund, “Transcript of Press Briefing on First Review Mission for IMF-Supported Program for Sri Lanka”, September 27, 2023, https://www.imf.org/en/News/Articles/2023/09/27/tr092723-press-briefing-on-sri-lanka. Accessed on September 28, 2023.
[iii] International Monitory Fund, “Transcript on IMF-supported EFF program Press Briefing for Sri Lanka”, 21 March 2023, https://www.imf.org/en/News/Articles/2023/03/21/tr032123-transcript-of-sri-lanka-press-briefing#:~:text=The%20IMF%20Board%20approval%20of,to%20reach%20a%20private%20agreement. Accessed on September 20, 2023.
[v]AP News, “Sri Lanka’s Parliament approves new anti-corruption law as part of an IMF economic bailout plan”, 19 July 2023, https://apnews.com/article/sri-lanka-imf-economic-crisis-33b821e8d53b2034ac231212d2927e23. Accessed on September 26, 2023.
[vi]Colombo Page, “The new Anti-Corruption Act will be enacted from the 15th”, 7 September 2023, http://www.colombopage.com/archive_23B/Sep07_1694109882CH.php. Accessed on September 28, 2023.
[vii] Newswire, ““Sri Lanka at a Crossroads: The IMF’s 16-Point Prescription for Reform”, 4 October 2023, https://www.newswire.lk/2023/10/04/sri-lanka-at-a-crossroads-the-imfs-16-point-prescription-for-reform/. Accessed on September 30, 2023.
[ix] The World Bank, “Revenue Mobilization is Fundamental for Sri Lanka to Get on a Sustainable Fiscal Path”, 3 October 2023, https://www.worldbank.org/en/news/press-release/2023/10/02/revenue-mobilization-is-fundamental-for-sri-lanka-to-get-on-a-sustainable-fiscal-path. Accessed on September 29, 2023.
[x]The Economic Times, “Sri Lanka lost around 1 million taxpayers since 2019 tax cuts, says finance minister Ali Sabry”, 6 May 2022, https://economictimes.indiatimes.com/news/international/business/sri-lanka-lost-around-1-million-taxpayers-since-2019-tax-cuts-says-finance-minister-ali-sabry/articleshow/91368659.cms. Accessed on September 30, 2023.
[xii]The Central Bank of Sri Lanka, Annual Report 2021, P.198, https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/publications/annual_report/2021/en/13_Box_07.pdf Accessed on September 28, 2023.
[xiv] Department of Census and Statistics, Ministry of Finance, Economic Stabilization and National Policies, “Sri Lanka Labour Force Statistics, Quarterly Bulletin, First Quarter 2023”, Issue No.100, http://www.statistics.gov.lk/Resource/en/LabourForce/Bulletins/LFS_Q1_Bulletin_2023.pdf. Accessed on September 27, 2023.
[xv]The Week, “Sri Lanka to push ahead with restructuring of loss-making state enterprises”, May 16, 2023, https://www.theweek.in/wire-updates/business/2023/05/16/fgn51-lanka-soe-restructure.html. Accessed on September 30, 2023.
[xvi] “First meeting of the Creditor Committee for Sri Lanka Statement’, 9 May 2023, https://www.mof.go.jp/policy/international_policy/economic_assistance/others/20230509.pdf#:~:text=On%20May%209th%2C%202023%2C%2017%20countries%20have%20formally,creditors%20as%20well%20as%20other%20official%20bilateral%20creditors. Accessed on October 1, 2023.
[xvii] Prime Minister’s Office, Government of Sri Lanka, “Prime Minister returns after a successful China visit”, 19th August 2023, https://www.pmoffice.gov.lk/news.php?para=RU5vekFVR2dpQTd2VGRiMkZUNE4wQ1ZkU0p6MWNSalM0Wm5tQzZpR2F0ZTQyc0JscFdtV0pVOVJEd3Z3UXBYbQ. Accessed on October 2, 2023.
[xviii] Bloomberg, “China Says Exim Bank, Sri Lanka Reached Preliminary Debt Deal”, 11 October 2023, https://www.bnnbloomberg.ca/china-says-exim-bank-sri-lanka-reached-preliminary-debt-deal-1.1982457.
[xix] Indika Sakalasooriya, “China takes front seat to lead SL’s debt restructuring process”, 11 October 2023, Daily Mirror, https://www.dailymirror.lk/top-story/China-takes-front-seat-to-lead-SLs-debt-restructuring-process/155-269112.
[xx]Dhanusha Gihan Pathirana, “DDR wipes out half of EPF/ETF incomes: An act of financial terrorism by CBSL”, 9 October 2023, https://www.ft.lk/columns/DDR-wipes-out-half-of-EPF-ETF-incomes-An-act-of-financial-terrorism-by-CBSL/4-753829. Accessed on October 9, 2023.
[xxi]The International Monitory Fund, “IMF Staff Concludes Visit to Sri Lanka”, 27 September 2023, https://www.imf.org/en/News/Articles/2023/09/27/pr23326-imf-staff-concludes-visit-to-sri-lanka. Accessed on September 28, 2023.
[xxii]The World Bank, “Sri Lanka Development Update 2023”, October 3, 2023, https://www.worldbank.org/en/country/srilanka/publication/sri-lanka-development-update-2023.Accessed on October 9, 2023.
[xxiii] Sri Lanka Export Development Board, “Sri Lanka’s Export Performance in August 2023”, 23 September 2023, https://www.srilankabusiness.com/news/sri-lanka-s-export-performance-in-august-2023.html. Accessed on September 30, 2023.
[xxv]The World Bank, “Sri Lanka Development Update 2023”, October 3, 2023, https://www.worldbank.org/en/country/srilanka/publication/sri-lanka-development-update-2023. Accessed on October 4, 2023.
[xxvi]Zulfick Farzan, “Over 200,000 left for overseas jobs so far in 2023”, Place of Publication? 4 September 2023, https://www.newsfirst.lk/2023/9/4/over-200-000-left-for-overseas-jobs-so-far-in-2023. Accessed on September 28, 2023.
[xxvii] International Monitory Fund, “Sri Lanka Technical Assistance Report — Governance Diagnostic Assessment”, September 2023, file:///C:/Users/samat/Downloads/1LKAEA2023002.pdf. Accessed on September 30, 2023.