Recent discussions aimed at concluding the third review under the Extended Fund Facility (EFF) provided to Sri Lanka took place in Colombo. The dialogues between representatives of the International Monetary Fund (IMF) and the Sri Lankan government were notably successful. The initial concerns that the new government would perform poorly in its dealings with the IMF have been dispelled. A clear indication of this progress is the achievement of a staff-level agreement on economic policies, which has been confirmed by the IMF itself.
To maintain economic reforms, the next loan tranche of approximately US $333 million is set to be released to Sri Lanka following approval from the IMF management and its Executive Board.
During the discussion, representatives from the IMF stressed the importance of sustaining economic reforms. The total amount of loans available to Sri Lanka under the four-year credit facility approved on March 20, 2023, is nearly US$3 billion. With the disbursement of the new loan tranche, the total value of the loan tranches provided by the International Monetary Fund to Sri Lanka will rise to US$1.3 billion.
The new government’s commitment is outstanding
Peter Brewer, Senior Mission Chief of the International Monetary Fund, held a special press conference in Colombo to present the discussion results. He emphasised that the new government’s commitment to the program objectives is commendable. Additionally, he noted that the government has successfully maintained policy continuity while enhancing its credibility.
Brewer emphasised the importance of protecting the hard-won gains achieved through the program thus far. He stated that the economy is on track for lasting recovery and stabilisation, highlighting the need to foster a growth path that benefits everyone. To achieve this, the International Monetary Fund stresses the necessity of maintaining the reform process in a sustainable manner.
The Sri Lankan economy has experienced a growth rate of 4 per cent
The Sri Lankan economy has experienced a growth of 4 percent compared to the same period last year. High-frequency indicators also show consistent growth across all sectors of the economy. The recent policy agreement that Sri Lanka reached with bondholders has significantly contributed to this progress, and the country has achieved an important milestone on its journey toward debt sustainability.
The International Monetary Fund emphasises the importance of mobilising revenue and maintaining expenditure restraint. Additionally, the Fund advocates for strengthening public financial safeguards for social protection spending to minimise the risk of government revenue loss and fraud.
It is important to keep fuel and electricity costs at a recoverable level. The IMF also states that addressing long-term debt will help reduce financial risks associated with state-owned enterprises.
Safeguarding the poor and vulnerable
An important point highlighted by Peter Brewer, the IMF’s Senior Mission Chief, is that it is crucial to protect the poor and vulnerable populations. The government has a responsibility to support these groups during challenging times. To achieve this, the IMF emphasises the need for the government to intensify its efforts to meet the minimum spending target set for social protection programs.
The IMF has recommended that social security coverage, particularly through subsidies, be further enhanced. The new government is committed to eradicating corruption, and the IMF believes this policy presents a chance to revitalise the reform process in Sri Lanka.
The next loan tranche will be released next month
Recent discussions have instilled confidence that the country will receive the next loan tranche under the IMF loan program next month. There were initial concerns among the public that the new government might struggle to implement the agreed-upon program with the IMF after its appointment. However, those concerns have now been alleviated.
In this situation, another argument presented by society is that the new government is following the same policies as the previous administration. The International Monetary Fund has noted that the new government has agreed to continue implementing the program established by its predecessor in the same manner. Additionally, President Anura Kumara Dissanayake recently stated in Parliament that steps will be taken to maintain the program currently in place with the IMF.
Foreign reserves are projected to grow to $6.4 billion
By October 2024, Sri Lanka’s foreign reserves had exceeded $6.4 billion. This increase can be attributed primarily to the growth in remittances from the tourism industry and overseas workers, contributing significantly to stabilising the economy. The International Monetary Fund (IMF) has also played a crucial role in this progress. Peter Brewer, the Head of the Sri Lanka Mission at the IMF, announced that a staff agreement had been reached for the third review under the $3 billion Extended Fund Facility (EFF). He indicated that $333 million would be disbursed as the fourth tranche of the EFF.
Sri Lanka received $330 million as the first tranche of the Extended Fund Facility (EFF). After completing the first review, an additional $337 million was disbursed in December 2023. Similarly, after the second review in June, $336 million was provided as the third tranche.
As a result of the successful completion of the third review between the IMF and the Sri Lankan government, Sri Lanka is set to receive an additional $333 million next month.
Peter Brewer, Senior Mission Chief of the International Monetary Fund, commented on the discussions.
“As a result of our discussions with the authorities, a staff agreement was reached on the third review of the four-year Extended Fund Facility. The authorities are to implement several preliminary measures to complete the reviews. We have also informed the government that it is very important that the 2025 budget is consistent with the objectives of the IMF program.
Ensuring adequate financing of the program is also important. Sri Lanka has achieved commendable results under the loan program. Sri Lanka’s economy has shown 4% growth in the four quarters ending in June this year. Inflation has been controlled. Official reserves have increased to $6.4 billion. The Central Bank has also made significant purchases of foreign exchange. However, the effects of the chaotic situation that arose with the economic crisis have not yet disappeared. Therefore, the benefits of economic growth should be distributed fairly to the entire population.”
Journalists reported that a significant mandate has been given by the majority of the people, including those from the central provinces, to oust the current government and establish a new one. In light of this situation, the existing government will need to adopt a different approach. Additionally, the head of the IMF responded to a question about whether the IMF is prepared to make any changes to its program in connection with this effort.
“The challenges facing Sri Lanka have not changed yet. Sri Lankans should think about how to fully recover from the economic crisis. The basic security framework of the loan program has been prepared to facilitate that. Within that security framework, it can be examined whether any amendments to the program are necessary, taking into account the new circumstances. And if it is something that needs to be done, it can be discussed.”
