• A staff level agreement for $ 2.9 billion Extended Fund Facility (EFF): The IMF staff mission and the Sri
Lankan authorities have reached a staff-level agreement to support Sri Lanka’s economic policies with a
48-month arrangement under the extended fund facility of about $ 2.9 billion. The arrangement is
subjected to the approval of the IMF Management and the Executive Board in the period ahead. The EFF
is also contingent upon the implementation of the reform actions that were agreed with the IMF, together
with the receipt of assurance from international partners (including bilateral and private creditors) in
terms of their financial commitment to support the EFF programme.
• The objective of the Extended Fund Facility (EFF): To restore macroeconomic stability and debt
sustainability (while protecting the vulnerable groups), safeguard financial stability, step up structural
reforms to address corruption vulnerabilities and unlock Sri Lanka’s growth potential.
• The EFF reform programme is built on strong policy measures, including:
• Raise government revenue to restore fiscal and debt sustainability
• Introduce a cost recovery pricing mechanism for fuel and electricity to minimise SoE-related fiscal risk
• Restore price stability by way of data-driven monetary policy, fiscal consolidation and phasing out of
monetary financing (money printing) and increase the central bank’s autonomy
• Rebuild foreign reserves
• Safeguard financial stability
• Strengthen social safety nets to mitigate the impact of the economic crisis and reforms
• Reduce corruption vulnerabilities to promote sustainable and inclusive growth
Q1: The importance of debt restructuring discussion for the EFF
Since Sri Lanka’s debt is assessed to be unsustainable, for the IMF to go ahead with lending, it needs to
be assured that the debt sustainability is restored.
This requires engagement with the debtor (Sri Lanka) and multifold creditors. This process is currently
taking place between creditors and debtors with their financial and legal advisors.
These financing assurances need to be secured to get the approval of the IMF Executive Board in order
to start disbursing the funds.
$ 2.9 billion is the total financing (excluding interest payment). The interest rate will be equivalent to
the SDR interest rate applicable at the time of the Executive Board meeting, plus other charges.
Q3: If certain bilateral creditors do not agree with the conventional debt
restructuring process, what will be the situation?
If creditors are not willing to provide assurances, it will deepen the crisis in Sri Lanka,
and undermine its repaying capacity. A deepening crisis means that resources available
to service debt will be less.
It is in the interest of all creditors to collaborate together with themselves and with Sri
Lanka to help the country to come out of the crisis as quickly as possible.
Q4: How will the EFF disbursement happen? Equally distributed upon the
achievement of policy targets?
• The EFF extends for four years. The total amount will be distributed across four years, and the first
disbursement will come at the time of the IMF Board approval.
• The board approval is subjected to the successful implementation of the action targets agreed with
the IMF. Each disbursement is tied to a review by the Executive Board.
• $ 2.9 billion is the contribution from the IMF. Usually, IMF programmes come with other financings
from creditors ( mainly by providing confidence to multilateral lenders), and that will add to the IMF
contribution (catalytic effect). Thereby, the programme’s financing will be larger than $ 2.9 billion.
Q5: Is $ 2.9 billion enough for Sri Lanka to come out of the challenging
macroeconomic situation?
Q6: One of the reform targets is to restore a market determined flexible
exchange rate. Are you advising the central bank to move away from the
current guided exchange rate policy?
An important pillar of the programme is to have a market-based and flexible exchange rate. This needs
to be implemented in a sequential manner.
Q7: Reducing corruption vulnerabilities – any specific actions/targets are
you looking at?
Governance and anti-corruption are very critical for the IMF for its lending programmes. The IMF wants
Sri Lanka to reduce corruption vulnerabilities to improve fiscal transparency and public financial
management and introduce a strong anti-corruption legal framework. The authorities are working on
legislation that harmonises with the UN’s convention against corruption. Governance diagnostics is
also important, and this will be supported by the IMF by giving necessary technical assistance.
Q8: Given that there is a staff-level agreement now in place, can Sri Lanka
access bridging finance facilities?
The staff level agreement is a signal of the commitment by the Sri Lankan authorities for significant
comprehensive economic reforms they have committed to the IMF, and this will be monitored by the
IMF once the programme is in place. This is a credible device to show creditors that Sri Lanka is serious
about engaging in reforms, thus opening avenues to get bridging financing facilities.
Q9: What is your assessment about Sri Lanka’s current political situation?
The political environment is crucial to successfully carry out economic reforms, as the government
should have the mandate to implement the reforms. The country has regained its political stability to a
greater degree now since the mission’s last visit in June 2022.
Q10: Sri Lanka doesn’t qualify under the Common Framework (CF) given
its middle-income country status. Do you think this is an occasion for the
IMF to convince the G20 to expand the CF to countries like Sri Lanka?
Sri Lanka is in a special situation, given a large part of its official debt lies outside of Paris Club
creditors. The Common Framework was put in place in the aftermath of the Covid crisis, however, this
is limited to low-income countries.As such, Sri Lanka doesn’t fall under the Common Framework.
From the IMF’s point of view, it is important to move expeditiously, to avoid Sri Lanka’s economic crisis
from becoming worse.
It is important to have a forum where creditors and the debtor (Sri Lanka) can discuss the road ahead in
terms of reforms, the plans to restructure its debt and ensure that all creditors will be treated equally.
Q11: Between a Staff Level Agreement (SLA) and an EFF, how long would
it take?
Moving from a SLA to an EFF, there is a number of prior actions that the Sri Lankan authorities have to take. The IMF
mission staff can recommend the disbursement of the funds to the IMF Executive Board upon the successful
achievement of the prior targets. Some of such contingencies are:
1. 2023 budget to be consistent with the macroeconomic framework that is agreed under the IMF programme
2. Getting financing assurances from the creditors (not only official creditors, but also from private creditors)
The government should provide them with relevant information and engage in good-faith negotiations. This process
generally takes time, as there is a large segment of creditors. Thereby, it is difficult to anticipate how long the process
would take. Historically, some cases have taken a long time, and that will not be in the best interest of the country.
Thereby the IMF encourages all parties to move expeditiously and in good-faith to find a quick settlement.
Q12: What kind of tax reforms is the IMF looking at? Are you looking at
wealth taxes too?
Sri Lanka’s tax collection is very low, and there is a clear need to increase revenue to support the fiscal
deficit.
Tax reforms under the programme need to be designed in a progressive manner, in order to get a
higher contribution from the high-income earners. In this context, to ensure progressivity the IMF
suggests to:
1. Increase personal tax (including higher tax rates for high-income earners)
2. Introduce wealth taxes (this is a part of the staff level agreement. The nuances of how to design is
under discussion)
Q13: What if there were delays in getting financial assurance from the
creditors?
Sri Lanka is experiencing a deep crisis (lack of fuel, medicine and food) and support in the short term is
urgent to avoid a humanitarian crisis. Delays in getting financial assurances from the creditors will
deepen the crisis further, and affect the country’s debt repayment capacity negatively. Prompt creditor
coordination and transparent collaboration are required to progress with the debt restructuring
process, and to make this interim period as short as possible.
This objective should be in the interest of everybody (to get Sri Lanka back on a path of strong and
durable growth), and for that the IMF encourages everyone to work together.
Q14: Some authorities in Sri Lanka have expressed their confidence in
getting the first disbursement by December. Is it possible?
It is very difficult to anticipate the timeline, as it depends on:
1. How quickly the reform targets will be implemented and
2. How quickly the debt restructuring disucssions will progress
Q15: What plans are on the cards to assist the poor and vulnerable groups
in Sri Lanka?
The poor and vulnerable groups are disproportionately affected by Sri Lanka’s economic crisis. The
programme aims to mitigate the impact on such groups by raising social spending and by establishing
a social registry to expand the targeted social safety nets for those who really need it. Tax reforms need
to be designed as progressively as possible, to support this cause. Disinflation strategies under the
programme are also critical to reduce the impact on such vulnerable groups.
