SL secures staff-level deal with IMF on first review

- The agreement paves the way for Sri Lanka to access approximately $330 million in the second tranche, pending IMF management and Executive Board approval

- IMF Board approval contingent on successful implementation of prior action and completion of financing assurance reviews ensuring progress in debt restructuring

- IMF says economic performance as of June is satisfactory, with exceptions in expenditure arrears and tax revenues

- Says prolonged debt restructuring discussions have weakened Sri Lanka's external position and slowed reserve accumulation

- Highlights securing agreements with official creditors on debt treatments in line with the IMF programme parameters and debt targets as the next critical step.

Sri Lanka and the International Monetary Fund (IMF) have successfully reached a staff-level agreement regarding the first review of Sri Lanka's US $ 3 billion, 48-month, Extended Fund Facility (EFF).

This crucial milestone is expected to open the path for the country to access the second tranche of the facility, which would amount to approximately US $ 330 million, subject to the approval by the IMF management and the IMF Executive Board.

“Upon approval by the IMF Executive Board, Sri Lanka would have access to SDR 254 million (about US$330 million), bringing the total IMF financial support disbursed under the arrangement to SDR 508 million (about US$660 million),” IMF said in a statement, yesterday.

The approval from the IMF Executive Board hinges on the successful implementation of all prior actions by the Sri Lanka authorities, and the completion of financing assurance reviews, which involve verifying the significant progress made in debt restructuring to ensure that the restructuring will be concluded in a timely manner and in alignment with the programme's debt targets.

“Programme performance at end-June was satisfactory, with all quantitative performance criteria for end-June met, except the one on expenditure arrears. All indicative targets were also met except the one on tax revenues. Most structural benchmarks were either met or implemented with delay by end-September 2023,” IMF Senior Mission Chief for Sri Lanka, Peter Breuer said.

He noted that even though the the economy is showing tentative signs of stabilization, full economic recovery is not yet assured.

“Growth momentum remains subdued, with real GDP in the second quarter contracting by 3.1 percent on a year-on-year basis and high-frequency economic indicators continuing to provide mixed signals.

Sri Lanka’s external position has weakened as a result of prolonged debt restructuring discussions, and reserve accumulation has slowed in recent months. Agreeing on debt treatments consistent with restoring debt sustainability quickly will be key to resolving uncertainty that is constraining Sri Lankan businesses and external financing,” he added.

Deputy Mission Chief Katsiaryna Svirydzenka stressed sustaining the reform momentum remains paramount for Sri Lanka’s economic recovery.

“We welcome the authorities’ commitment to increase revenues and signal better governance by adopting needed tax measures, strengthening tax administration, and actively eliminating tax evasion. Maintaining cost recovery in fuel and electricity pricing helps mitigate fiscal risks arising from state-owned enterprises,” she said.

Meanwhile, the IMF officials noted that the critical next step for Sri Lanka is to secure an agreement with official creditors on a debt treatment consistent with the IMF Executive Board-approved program parameters and debt targets.

“We have taken note of a tentative agreement between Sri Lanka and the Export-Import Bank of China and look forward to analyzing the details when we receive them. We urge all official creditors to move forward and agree on an appropriate debt treatment in line with the financing assurances they provided,” Breuer said.

“We understand negotiations between commercial creditors and Sri Lanka are ongoing and emphasize the need to restore debt sustainability in a robust manner. Delays risk worsening the economic outlook for Sri Lanka, widening its financing gaps, hindering its return to sustainable growth, and thereby reducing its capacity to repay,” he added.

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