Sri Lanka all set to finalise SLA with IMF

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Sri Lanka has already fulfilled the necessary pre-conditions to reach the   Staff-Level Agreement (SLA) with the International Monetary Fund (IMF), a senior representative of the government told Finance Today.

Accordingly, he stated that the necessary arrangements will be finalised today (31st) to reach the SLA with the IMF. The IMF delegation which is currently visiting Sri Lanka, is scheduled to conclude their tasks today (31). Accordingly, based on the progress of their visit, the necessary recommendations are to be submitted to the top management of the IMF to reach an SLA with the IMF.

How ever other senior officials managing the country’s economy said that the govt is close to finalising a Debt Sustainability Analysis (DSA) that is a crucial next step. However, they cautioned that there are some key hurdles to overcome before achieving a Staff Level Agreement with the IMF.

Based on the proposed responses of the IMF, Sri Lanka has also taken steps to launch a ‘Bridge Finance ‘rising campaign with friendly nations. Accordingly, arrangements have been made for President Ranil Wickremesinghe to visit Japan in the last week of September. However, reports say that India is somewhat unhappy with Sri Lanka’s recent favourable actions towards China. “We intend to hold talks with the major creditors to Sri Lanka regarding debt restructuring,” President Wickremesinghe said yesterday in his budget speech.

LAZARD DEBT SUSTAINABILITY REPORT

Regarding the debt restructuring process in Sri Lanka, the report prepared by its financial advisers, Lazard Group, has already been studied by the IMF and the Sri Lankan authorities.

The relevant agreements reached between the two parties are to be officially notified in the near future. A major criterion will be to reduce the Public Debt to GDP ratio, which is currently close to 140 per cent, to a level below100 per cent on a medium to long-term basis within a time frame of 10 years (2023-2032).

INTERIM BUDGET

Following the IMF pre-conditions, President  Wickremesinghe as the Minister of Finance took steps yesterday to present an interim budget by further implementing the measures to reduce the Government’s expenses and restore the Government’s revenue policy to the state it was in before the 2019 presidential election. The Government was committed to implement revenue-based fiscal consolidation measures as per IMF conditions to reduce the ballooning budget deficit. The Government will continue to present further proposals in this regard through the budget for 2023 to be presented in November.

SOE REFORMS

According to the President’s Budget speech, the Government has decided to establish a State-owned Enterprise Restructuring Unit with a budget allocation of Rs 200 million. And also proposes to issue 20% stake of State-owned Banks such as the Bank of Ceylon and the People’s Bank to employees and depositors. 

The Government has already agreed to restructure the major loss-making state entities namely, the Ceylon Electricity Board (CEB), Ceylon Petroleum Corporation (CPC) and SriLankan Airlines. The IMF has recommended that the CEB and the CPC should follow a cost-reflective pricing policy and the quick privatisation of SriLankan Airlines. Accordingly, the Government has already introduced a cost-reflective pricing policy for the Petroleum and Electricity sector. The Government had also agreed at the last minute to transfer the ownership of 49 per cent of the profitable catering and ground handling divisions of  SriLankan Airlines to the private sector along with its management in order to settle the foreign debt of more than one billion US dollars.

ABSORPTION OF CEB AND CPC ACCUMULATED LOSSES

The IMF has also proposed that losses and other liabilities of the CEB and the CPC should be absorbed into the State accounts. However, he said that the Government has not responded well to the proposal so far.

NEW CBSL ACT

The IMF has also recommended that the Laws and Ordinances to make the Central Bank of Sri Lanka an independent institution outside the control of the central government should be submitted to Cabinet for approval. Accordingly, the Government is planning to replace the existing Monetary Law Act and submit the new Central Bank Act for Cabinet approval within the next few weeks subject to some amendments to the previously abandoned Bill. Delivering the interim budget speech, the President yesterday promised to introduce a new Central Bank Act. In order to reach a Staff-Level Agreement with the IMF, it is necessary that Sri Lanka presents a comprehensive economic adjustment programme to them. It will be mandatory to get the full approval of the IMF Board of Directors to implement an economic adjustment programme with the IMF. For that, it will be mandatory to obtain the full consent of bilateral lending parties for the debt restructuring process in Sri Lanka. Getting China to agree to this has been the biggest challenge so far.

By Ishara Gamage