Achieving timely restructuring agreements with creditors in line with the program targets by the time of the first review is essential to restoring debt sustainability, concluding the visit to Sri Lanka, the IMF staff mission said.
An International Monetary Fund (IMF) mission led by Peter Breuer and Masahiro Nozaki conducted a staff visit to Colombo from May 11 to 23, 2023 to discuss recent economic developments and implementation of the Fund-supported program.
At the conclusion of the visit, Breuer and Nozaki issued the following statement:
“During the visit, we discussed recent macroeconomic and financial sector developments. Following strong policy efforts, the macroeconomic situation in Sri Lanka is showing tentative signs of improvement, with inflation moderating, the exchange rate stabilizing, and the Central Bank rebuilding reserves buffers. However, the overall macroeconomic and policy environment remains challenging.
“We welcome the authorities’ ongoing efforts in meeting key commitments under the Fund-supported program. Performance under the program will be formally assessed in the context of the first review of the Extended Fund Facility arrangement, which is expected to be undertaken in September 2023. The mission discussed additional fiscal efforts that will be critical to ensure successful revenue mobilization. We also discussed progress on debt restructuring, noting the ongoing discussions with both foreign and domestic creditors. Achieving timely restructuring agreements with creditors in line with the program targets by the time of the first review is essential to restoring debt sustainability. Keeping up the reform momentum and ensuring timely implementation of program commitments, including to ensure central bank independence, improve governance, and protect the vulnerable, are key for Sri Lanka to emerge from the economic crisis.
“The team met with President and Minister of Finance Wickremesinghe, Governor Weerasinghe, Secretary to the Treasury Siriwardana, senior government officials, members of the opposition parties, CSOs, think tanks, trade unions, the private sector, and development partners. We would like to thank the authorities for the open and collaborative discussions and look forward to our continued close engagement.”
All that can be read with certainty in the words of the IMF is that “the overall macroeconomic and policy environment remains challenging” …and that “performance under the program will be formally assessed in the context of the first review of the Extended Fund Facility arrangement, which is expected to be undertaken in September 2023”.
This “performance” includes debt restructuring and revenue collection. It is unlikely that Small and Medium scale Enterprises will be in a position to pay their taxes. Those of them still functioning may not be able to survive for long. Loss of employment will take large numbers of individuals below the threshold further reducing revenue collection.
Significantly there is no mention of when debt servicing and repayment will commence or where the money for these payments will come from. Recovery of stolen assets and seizure of illegal wealth in order to meet these payments seems to be unavoidable. The criminalization of corruption and conviction of offenders may encourage business persons to repatriate their earnings bringing the practice of trade mis-invoicing to an end.
The relevant laws are expected to be in place before the IMF review in September. The future of business activity on the island as well as the realization of potential foreign direct investment depends on this. The nation waits with bated breath the coming of September when prospects for the future may become clear.