by International Monetary Fund, Washington, DC, March 21, 2023
Video of press briefing at IMF Videos – Press Briefing on the IMF Executive Board Approval of the Extended Fund Facility (EFF) Arrangement for Sri Lanka
Staff country report, March 20, 2023
T R A N S C R I P T
Senior Mission Chief for Sri Lanka Peter Breuer (right) with Country Mission Chief for Sri Lanka Masahiro Nozaki – File photo by DailyFT
MS. YAN: Thank you so much every one for joining this IMF Press Briefing on the IMF-Supported EFF Program for Sri Lanka. My name is Ting Yan. I’m from the Communications Department at the IMF. I’m happy to be joined by our two speakers today. We have Peter Breuer, Senior Mission Chief for Sri Lanka. And also Masahiro Nozaki. He’s the mission chief for Sri Lanka. Both are from the Asian Pacific Department here at the IMF.
We have, earlier today, we have published a Sri Lanka Staff Report as well as the Press Release. I hope you have all read the report and the press release.
For today, Peter will start by giving some opening remarks to highlight the key messages of the report. And then we will be happy to answer your questions. Since we started late, we will probably do this press conference around 45 minutes. If you plan to ask any questions, you may want to use the raised hands function on the WebEx and please stay muted when you’re not speaking. With that, Peter, the floor is yours.
MR. BREUER: Thank you very much Ting and good morning and good evening to everybody here on this call. Thanks so much for joining us. We look forward to spending some time with you to go over the IMF supported program.
Let me give some opening remarks first. So, today, the IMF Executive Board approved a 48-month extended arrangement under the extended Fund facility of 2.286 billion SDR, Special Drawing Rights, and that corresponds to about 3 billion U.S. dollars to support Sri Lanka’s economic policies and reforms.
Sri Lanka, as you know, has been facing a severe crisis as a result of past policy missteps and economic shocks. We’ve been deeply concern about the impact of the crisis on the Sri Lankan people, particularly the poor and vulnerable groups, and about the economic costs of the delay in the country’s access to external financing.
Today’s Board approval marks an important step towards the resolution of this crisis. Sri Lanka will immediately receive an initial disbursement of about $330 from the EFF arrangement, which is expected to catalyze a new external financial including from the Asian Development Bank and the World Bank.
The reform program supported under the EFF arrangement is built on strong policy measures and prioritizes five key pillars. First, an ambitious revenue-based fiscal consolidation, which is accompanied by stronger social safety nets, fiscal institutional reforms, and cost recovery-based energy pricing to ensure the state’s ability to support all its essential expenditures.
Second, restoration of public debt sustainability including through a debt restructuring to ensure stable financing of the Government’s operations.
Third, a multi-pronged strategy to restore price stability and rebuild reserves under great exchange rate flexibility in order to alleviate the burden of inflation, particularly on the poor. And to foster an environment of investment and growth, and to ensure Sri Lanka’s ability to purchase essential goods from abroad.
Fourth, policies to safeguard financial sector stability, to ensure that the financial sector can play its key role in supporting economic growth.
And fifth, structural reforms to address corruption vulnerabilities and enhanced growth. Commendably, Sri Lanka has already started implementing these challenging policy actions. It is now essential to continue to reform momentum under strong ownership by the authorities and the Sri Lankan people more broadly.
Economic impact of the reforms on the poor and vulnerable needs to be mitigated with appropriate measures. In this regard, we welcome the authorities’ firm commitment to strengthen social safety nets, including through a minimum spending floor, well-targeted spending through the new social registry and establishment of objective eligibility criteria.
Tax reforms under the program are designed to be progressive. That is, ensuring greater contributions from higher income earners. Efforts to increase tax revenues should be pursued in a growth friendly manner while protecting the poor and most vulnerable.
Sri Lanka’s public debt at the 128 percent of GDP as of end 2022 is unsustainable. The country is in arrears to all its external creditors. The IMF Board approval of assistance to Sri Lanka requires assurances from official bilateral creditors that they will provide debt relief and/or financing to restore debt sustainability consistent with the program, as well as an assessment that the authorities are making good faith efforts to reach a private agreement with private creditors. And these requirements were met ahead of the Board meeting.
It is now important for the Sri Lankan authorities and creditors to closely coordinate and make swift progress toward the debt treatment that restores debt sustainability under the EFF supported program. The President’s recent open letter to official bilateral creditors includes commitments to transparency and comparability of treatment for all external creditors, which should help facilitate this process. IMF staff will continue to assist the authorities with creditor coordination in line with IMF’s policies.
Finally, we emphasize the importance of anti-corruption and governance reforms as a central pillar of the EFF support program. They’re indispensable to ensure the hard-won gains from the reforms benefit the Sri Lankan people. The authorities have committed to fundamentally improve public financial management and strengthen the anti-corruption legal framework in line with the United Nations Convention Against Corruption.
The IMF is conducting an in-depth governance diagnostic exercise which will assess corruption and governance vulnerabilities in Sri Lanka and provide, prioritize, and seek recommendations. Sri Lanka will be the first country in Asia to undergo a governance diagnostic exercise by the IMF. We very much look forward to further engagement and collaboration with stakeholders and civil society organizations in this critical reform area.
Let me conclude by saying that the IMF supported program is an opportunity for all Sri Lankans to come together to work through this crisis to restore economic stability and put the country on a sustainable growth path. Thank you very much.
MS. YAN: Thank you very much, Peter. Now, we’re open for your questions. I already see many hands up in the participants’ list. If you have any questions, please use the raise hand function. And please wait until you are called on, and keep yourself muted.
So, let’s take a couple of questions. Let’s take you three first, David Please go ahead.
QUESTIONER: Hi, just to find out what sort of conditions are being imposed on Sri Lanka. Are there like, strict conditions Sri Lanka needs to meet immediately for first tranche to come through. And when are we expecting the first transfer to come through as well for Sri Lanka? Thank you.
MS. YAN: Let’s take Ruchi from Bloomberg.
QUESTIONER: Yeah, hi. I’m from Bloomberg. Peter, I just wanted to understand on the debt treatment you have said in your statement that Sri Lanka needs to make quick progress on debt treatment. Will that also include the inclusion of local debt? And secondly, for the first time, you’ve emphasized anti-corruption and governance norms as well. What would really make a part of the diagnostic exercise by the IMF?
MS. YAN: Thank you. And we have the next one on the line is Sampath. Sampath, please go ahead.
QUESTIONER: I am Sampath Dissanyake from BBC’s Sinhala Service. My question is, according to Sri Lankan Government, there is no funding available to hold local Government elections. Elections are to be postponed. Will the Sri Lankan Government be able to hold election use in this credit facility to release immediately. Is the Government, is the IMF of the opinion that the Government would prioritize this because election are a critical component of their democracy?
MS. YAN: Thank you. Peter, Masahiro, we can take these questions first.
MR. BREUER: Yeah, thank you. Thank you so much. I will take a couple of those and Masahiro will take some as well. So, we have published the staff report which also includes the memorandum of economic and financial policies which contains all the conditions, or, yeah, that have been discussed between the Sri Lankan authorities and the IMF and agreed upon.
In particular, tables one and tables two of this, we call it MEFP by its shortcut layout. One has been agreed. Maybe just to highlight a few things upfront. Sri Lanka has already incorporated quite a number of measures to start the reform efforts. So, in the fiscal area, there has been strong effort on a revenue-based consolidation. As you know, expenditures are significantly higher than revenue, and so, there’s a significant effort underway to bring in some balance there.
In the monetary area, the efforts to make the Central Bank more independent to allow it to fight inflation which is a significant tax on the poor in particular. And then, there are areas in the financial area, for example, to make sure that the banking system is well capitalized. So, these are just some broad areas and the details are in the papers we published.
The first tranche will be made available soon, in the next two days or so. And going forward, disbursements will be tied to reviews that take place every six months.
On the question of local debt, so, in the staff report you can see the targets that the authorities and the IMF have agreed upon. With respect to the stock of debt with respect to gross financing needs and with respect to external debt service. So, for the IMF to lend to a country, it usually requires a sustainable debt situation. Only then, can the IMF actually go ahead and lend.
Now, in Sri Lanka’s case, the debt is not yet sustainable, but with financing assurances that have been provided, it is seen to be sustainable on a forward-looking basis. And that is a debt treatment consistent with these targets. So, it is up to the authorities to find a way how to meet these targets and ensure that it is met. So, whether local is included in there or not, is for the authorities to set up. What we worry about, of course, is whether there are any implications with respect to the economy or to financial stability. So, that is the angle that we would be looking at. Maybe Masahiro can answer the remaining questions.
MR. NOZAKI: Peter, thank you for this opportunity for us to explain the Board approval of the EFF arrangement. Very nice to see everyone. Let me just two questions.
So, first local elections, I’d like to say that the IMF does not intervene in any country’s electoral governance processes. And in the case of Sri Lanka, the question of election is a matter for Sri Lankan Government and the Sri Lankan people. And there has been some speculation about our engagement and inference on elections, but I’d like to clarify that. We, IMF, we have never recommended postponing local elections in Sri Lanka. We have never recommended postponing local elections.
And turning to anti-corruption diagnostic exercise. So, I’d like to perhaps highlight a few things. This is a diagnostic assessment analytical report produced by IMF governance mission. And the mission is indeed almost started. It’s a diagnostic exercise with the Government and strong coordination engagement with stakeholders including civil society. The objective is to examine the severity of corruption in Sri Lanka and identify key governance weaknesses and corruption vulnerabilities. And it will also assess the adequacy of the anti-corruption framework, and policies that are needed to address corruption vulnerabilities.
The focus of the IMF diagnostic will be IMF’s core issues, including fiscal governance, financial sector oversight, Central Bank governance, market regulations, rule of law, and AML/CFT.
And I’d like to finally say that this report is going to be published by September 2023. This is one important milestone of the program and the agreement with the authorities. Thank you.
MS. YAN: Thank you Peter. Thank you, Masahiro. We have more questions, first one, Archana from BBC. Archana, please go ahead.
QUESTIONER: Hi, I have two questions. One, what are the targets that the IMF has put on the debt treatment procedure for Sri Lanka when they talk with their private and solvent creditors. So, I understand there are certain targets and milestones that the country has to achieve to get the next tranches off the bailout loan. So, in that, what is it for when it comes to debt treatment and the debt restructuring talks with creditors.
The second question is what are the targets that have been set on achieving what levels of inflation and growth for the country?
MS. YAN: Thank you, Archana. Let’s take one more. Please go ahead.
QUESTIONER: Okay, thank you for the opportunity. Yeah, just to follow-up on that question as well about debt restructuring, if you can tell more about that. What’s next on that front. And also, just a question on the presidential elections. Is IMF in favor of having presidential elections maybe sooner in Sri Lanka? Thank you so much.
MS. YAN: Thank you. And next from Nikkei Asia.
QUESTIONER: Okay. Can you hear me? Yeah. It’s about the austerity measures, I mean, the IMF is presenting a new face when it comes to helping the vulnerable communities, which in the shift from what you did in ’97 after the Asian financial crisis. But if you look what has unfolded in Sri Lanka over the last year, clearly, those at the lower end of the economy are feeling the pain as a result of the rupee, borrowing costs have gone up, the price of electricity has gone up. So, on one hand, on paper, you seem to be generous, but when you look at the reality on the ground, there is (inaudible) economic pain that could precipitate the social crisis, and even the political crisis like the one we saw last year that resulted in the downfall of the Rajapaksa family. Thank you.
MS. YAN: Thank you. Let’s take these questions first.
MR. BREUER: Thank you very much. So, maybe starting with the last question first. So, this sort of position that the IMF is imposing, this austerity, over the last six months, or you could say a year. Since the crisis started, as you know, there has been no IMF support. The IMF support starts today. And that has just shown what a brutal experiment it is to have to adjust the economy from one equilibrium to the other without any external support.
No one is willing to finance that big gap between expenditures and revenue of the Government. In 2021, revenues were something like 8.6 or so percent of GDP and expenditure of 9 percent. In the past, the Government has been able to finance that with borrowing from official and private creditors. At the moment, no one is willing to cover that gap. And hence, the adjustment is very brutal. The Government needs to raise its revenue very quickly and the Central Bank has been printing money which has been fueling inflation. Inflation is one of the bluntest tools you can have because it creates — it’s particularly bad for the poor.
And so what the Fund does is two things. It supports the authorities in adjusting their policies to correct these imbalances and it provides some financing that cushions this adjustment. That allows this adjustment to take a little bit more time than it would if there were no external support at all. And by capitalizing additional support from other multi-lateral institutions, this cushion gets a little bit bigger. And so, I just wanted to sort of correct the notion that the Fund is causing austerity. It is something that’s a result of the crisis and the Fund is there to lessen the impact a little bit. But the adjustment will nevertheless be a harsh one.
And so, on the debt restructuring, there were a couple of questions. So, the targets in particular are that need to be reached in negotiations with creditors. I laid out in the MEFP, paragraph 15, so there’s one on the debt stock that says that the debt stock of Sri Lanka should reach 95 percent of GDP by 2,032. That’s the first one.
The second one is to have gross financing needs below 13 percent of GDP between 2027 and 2032, on average. And that would be down from a high number of more than 34 percent of GDP in 2022. And the third target is to have the Central Government’s annual debt service in foreign currency below 4.5 percent of GDP in every year between 2027 and 2032. And that’s down for more than 9 percent of GDP in 2022. So, then also to respond to the question of what is next in the debt restructuring process.
So, Sri Lanka with the eight of their legal and financial advisors now, needs to present that restructuring strategy and it has committed to do that by the end of April. And this strategy, it would use to approach its catalyst to negotiate restructuring consistent with these targets would mean that we would consider the debt sustainable. And the official bilateral creditors have given their assurances that they will negotiate a restructuring consistent with these terms.
And Sri Lanka has already engaged in discussions with the commercial creditors and it should be noted that they have actually sent an unsolicited letter, at least a subgroup of them that gives their assurances to do the same. So, it will now be important to expedite this process to go forward. Let me stop here and hand to Masahiro for any other questions.
MR. NOZAKI: Thank you, Peter. Let me first address it. So, again, I’d like to repeat that we, IMF, we do not intervene in any country’s electoral government processes. And then, the question of election, no matter what the national or local is a matter for the Sri Lanka Government and Sri Lanka people.
And secondly, okay, targets on inflation and growth, the IMF has not put targets or (inaudible) targets on growth, because growth, economic growth depends on many things. And it is not within the control of the authorities. However, due to the inflation target and you can find the specific target in Table 1 attached to MEFP where the authorities and IMF would agree to have a target around the ban between 12 percent and 18 percent by end of 2023 with a mid-point of 15 percent. If the actual inflation is not within this ban, there will be consultations either with staff or with the IMF Executive Board. That’s how the inflation target in consultation with you are constructed for this program. Thank you.
MS. YAN: So, I see many hands up, more than 10 hands here. So, let’s take Daily Mirror first.Please go ahead.
QUESTIONER: Yeah, thank you. I think I’ll be brief. I have three questions. Would you be advising the Government of phasing out the import restrictions currently in place. That is number one. And this, number two, there’s still confusion about whether the bailout package approved can be used for fiscal support? Would you please clarify on that? And the third is on exchange rate. The CD still intervenes in the market. So, would you be advising against that going forward. Thank you.
MS. YAN: Thanks. Question from Ada Derana 24?
QUESTIONER: My question is another trade union in Sri Lanka are forcing the new tax policy of the Government. And they are urging the Government to amend the policy. Recently trade unions carried out an island (inaudible) against the paid tax as well. Now, the Government has informed the trade unions that it will consider changes to the tax policy after the first review (phonetic) of the IMF program. What is IMF’s official stance on this with those changes if they’re made, affect the agreement between the Government of Sri Lanka and the IMF?
MS. YAN: Thank you. I see we already have four, but let’s try to take another one. Philip, please kindly be brief.
QUESTIONER: Yes, hi. With regard to China’s financing assurances, what will the elements lacking in exempt banks January letter and what changed specifically in the March letter? And does it contain a specific commitment to restructure or is this the wiggle room on that front? And were there any concerns that China had that contributed to this delay? And what changed their mind? Thank you.
MR. BREUER: Okay, thank you. That is quite a set of questions. So, maybe I start with — okay, the last part maybe is the most straightforward. So, the specific point in discussions with official bilateral creditors was to obtain what we call specific and credible assurances. So, these assurances needed to indicate an understanding of the debt situation in Sri Lanka that the debt situation is not sustainable. And a willingness to negotiate a restructuring that is consistent with the debt targets under the IMF program in order to restore debt sustainability under the IMF program. And so, that took some time. I mean, there were efforts already starting in last summer when we were there. The Sri Lankan authorities started engaging with their creditors, with their official bilateral creditors. I should clarify that these financing assurances are needed from official bilateral creditors.
There have been three meetings between the Sri Lankan authorities and the official bilateral creditors last fall where information was presented. Lots of data was provided to the creditors and so, this process went on for some time in terms of discovery of information. And then, early this year, focused specifically on the questions of obtaining these specific and credible assurances and there was engagement from the authorities with their creditors and also from the IMF staff and management at all levels. And the final assurances were obtained less than two weeks ago. Just one day before we submitted our papers to the Executive Board. And, yeah, so concerns have revolved around having adequate set of information and data; try to understand what the implications of the targets are for creditors’ own debt and so forth. But, as I said, as soon as all the assurances were obtained, we went ahead to present the case to the Board, to the Executive Board.
So, maybe I take the question also on the trade unions and whether this affects the agreement, and Masahiro can take the other questions. So, we understand the hardship of the people in Sri Lanka that they’re experiencing at this time. There have been incredible increases in the cost of living. There has been loss of employment, loss of livelihood, rising energy costs and falling real incomes that have really hit the population large and in particular, the poor and vulnerable who have no buffers to deal with this crisis. And so if the current economic crisis has a number of origins including the Government’s inability to meet Government spending needs to revenue collection. And I was already talking about the revenue, Sri Lanka is amongst the countries that collects the least amount of fiscal revenue in the world. With the revenue to GDP ratio of only 8.3 percent in 2021 when expenditures were 19.9 percent. And as I mentioned, external creditors are not willing to provide to fill that gap. So tax reforms are badly needed to correct this imbalance. And only with appropriate tax receipts will the government be able to fund essential expenditures and to avoid further slashing critically important outlays. So these reforms will also help to regain the confidence of creditors so that in the future they will once again finance the gap between revenue and expenditure. The efforts to increase tax revenue should be pursued in a growth friendly manner while protecting the poor and the most vulnerable. And it is important that those who can afford it make commensurate contributions to the financing of necessary government expenditures.
The tax package the authorities have introduced include the new tax rate schedule — including the new tax rate schedule for personal income tax helps to meet these objectives. And the tax rates proposed under the authorities program are also in line with similar countries who are contributing to Sri Lanka’s support package through the IMF. So it’s important to remember that there are many countries out there who have income levels comparable or maybe less than Sri Lanka with much higher income tax rates. And so they are looking to Sri Lanka to implement appropriate reforms. Let me stop here and pass to Masahiro.
MR. NOZAKI: Let me address the remaining three questions. So first of all, whether this time the EFF supported program is for fiscal support or not. The answer is yes, this is for the fiscal budget support. The amount dispersed in today is around $303 million worth of SDR will be available for the government to use.
Secondly on import restrictions, so the agreement under the IMF program agreement between us and the authorities, the authorities will develop a plan for the phased removal of import restrictions, exchange restrictions, and other restrictions related to balance of payment. And that plan is due by June 2023. So this is a plan. But this shows one important implication of IMF supported program. It allows the country to gradually normalize its balance of payment so that these restrictions can be relaxed gradually over time. And then over time the program under the program, Sri Lanka will develop — rebuild its international reserves. So that will also help normalization of balance of payment transactions. So that leads to resolution of balance of payment problems.
And that leads to the question on exchange rate intervention question. The authorities commit to implement flexible exchange rate, meaning that it will allow market to determine the exchange rate with the intervention restricted to adverse market conditions. And another important feature of the program is that the central bank commit to purchase foreign exchange US dollars amount of $1.4 billion in 2023. It’s an outright purchase from the market, foreign exchange market, that is help, that will help rebuild the reserves and that effort, for that effort allowing exchange rate flexibility is going to be important. And that is why the exchange rate flexibility is one important pillar of the program. Thank you.
MS. YAN: Thanks very much. Peter, Masahiro, let me take one question from News First. Zulfick.
QUESTIONER: Hi. My question is, the IMF statement that was released early this morning speaks about a Social Security net for the poor and vulnerable. My question to you is, the Social Security net, are you referring to any budgetary allocations through the IMF disbursement that is coming in? If so, which branch would it be? And if it is not going to be from the IMF disbursement, how do you plan on advising the government to address the Social Security net issue for the poor and vulnerable? Thank you.
MS. YAN: Thank you. Next one is Economy Next.
QUESTIONER: Thank you. I have two questions. One is about the anticorruption framework. Does this include staff recovery from the other countries? Because this has been much spoken in the Indian anti-corruption moves in Sri Lanka. So does this also include the UN based policies to recover the stolen money from being kept in the other countries? That’s my first question.
Second question is where do you think the hardest policy will come now? Already Sri Lankans are struggling on the public sector, reducing the public sector size. So where do you think the policy issues or the concerns will come in this program? Thank you.
MS. YAN: Thank you, Shihar. Let me also take Meera Srinivasan from The Hindu. Meera, please go ahead.
QUESTIONER: I have two questions. The first is a follow up to my colleague’s question on the taxation and the ongoing protest. So, when the staff level agreement was announced in September, the IMF suggested that Sri Lanka should also consider a wealth tax in addition to a progressive tax regime. So is that a line that the IMF is still pushing? Is a wealth tax on the cards?
My second question is within Sri Lanka, there is growing concern about the space for dissent. We see frequent protests against austerity measures and also instances of police and others dressed in military gear firing tear gas and water cannons, including at school students recently. So will the IMF continue engaging with Sri Lanka irrespective of these concerns domestically? Does it matter to you?
MS. YAN: Thank you.
MR. NOZAKI: Thank you. So let me address questions on social safety net and, okay, anti-corruption and perhaps wealth tax. On social safety net, maybe just a few things I’d like to explain. However, the detail is in the annex in the staff report and we covered it in annex four of the staff report covers very extensively on this very important critical reform on social safety net. So first, the program sets a minimum spending floor by the government on the social safety net program. And then the definition is defined in this annex and the program document. But 187 billion rupee for 2023 is amounting to 0.6 percent of GDP. Ensuring the real level of benefit will stay the constant and the number of beneficiaries will be similar to what was done in 2022. And that is a minimum spending floor, it’s important target for the program. We will monitor if this minimum spending target is observed.
The second thing is the social safety net. Improving coverage and targeting is very important. So right now the social safety net covers around 40 percent of poor household. That should be significantly increased and some social safety net spending is paid to relatively rich families. Around 10 percent is paid to rich segment of the Sri Lankan society. So that should be corrected. This reform will be done throughout 2023. An important milestone is mid of this year the approval of the welfare benefit payment scheme that is detailed in our structure benchmark table, table two of MEFT.
And last but not least, the IMF’s disbursement is not tied to specific spending. There is a difference perhaps from other program or project loans from other international creditors or lenders. In the case of IMF, this amount is used by the government and then it doesn’t attach to specific spending.
Anti-corruption framework, let me quickly get back to the question on asset recovery. Here again we cover this important topic, anti-corruption and governance issue, in one of the annex and then you can see that in the detail but important message I’d like to convey here is that Sri Lankan government commits to introduce anti-corruption legislation in line with UN Convention Against Corruption. And that includes both asset declaration and asset recovery. Asset declaration part is going to be addressed in the near term, the anti-corruption law. And asset recovery part takes a little bit more time and then that is going to be addressed by March 2024. On top of that, the governance diagnostic will further recommend the specific reforms in the anti-corruption area.
The last one, wealth tax. So yes, we mentioned it in the staff level agreement and now we can say that it’s part of the program agreed between us and the authorities. The introduction of property tax and wealth transfer tax is envisaged in 2025. So that takes a little bit time because of preparation. For example, the asset real estate valuation system takes some time to prepare and develop and that is important reform to be implemented in 2025 and that again is important to make the tax package more progressive, that is more contribution from relatively high-income earners. Thank you, I’ll stop here.
MR. BREUER: So let me try and address the other two questions. So in terms of space for dissent, that type of questions. So, the IMF is an international organization with a limited technical mandate. The IMF’s purposes are all economic in nature and focus on promoting macroeconomic and financial stability, economic growth, assisting members in addressing their balance of payments needs. So as such, we don’t have a mandate when it comes to the governance or the government of the people and how it interacts with its people. That’s a stable economic and financial environment, which is the proposed policy under the EFF supported program, that the program aims to achieve in Sri Lanka. Those stable environment can provide a critical foundation when it comes to enhancing human rights.
And then when it comes to so what are the hardest policies? Well, it is certainly an ambitious reform agenda, in particular the turnaround in the fiscal policies. So for example, the primary balance is envisaged to turn around from negative 5.7 percent in 2021 to 2.3 percent of GDP starting in 2025. So that’s a considerable turnaround. That is quite ambitious. But what is the alternative? I think the alternative would be the hardest part not to reform because that would just extend the crisis that is there now and that would destroy economic value in Sri Lanka in a much more significant and prolonged way for a long time into the future. So embarking on this ambitious reform agenda and putting the economy back on a trajectory for stable and inclusive growth will in the end be much better for the country than not undertaking these reforms and prolonging the crisis and making it worse, essentially. Thank you.
MS. YAN: Peter, Masahiro, we are running out of time but I see there are still many hands there. So let’s take as many as possible and try to address these questions. Amal from AFP. Amal, please go ahead.
QUESTIONER: Thank you. I’m just trying to get some clarification on this line that Sri Lanka will be the first country in Asia to undergo this governance diagnostic exercise. Can you take us through what are the other places where you have done this kind of thing and how do you expect Sri Lanka to be your test case in Asia? What are the sort of key things that you’re looking — you’ve seen some of it in the staff report, but very briefly, what are the key areas and what are the things that we’ll be able to –milestones we’ll be able to see in this process? Thank you.
MS. YAN: Thank you. Amal. Next, let’s take Sidhant Sibal. Sidhant, please go ahead.
QUESTIONER: My question is, how do you see India’s role when it comes to the economic crisis Sri Lanka is facing? What’s IMF’s view?
MS. YAN: Thank you. And Ryosuke Hanada from Nikkei.
QUESTIONER: Hi, good morning. I would like to quickly ask two questions. One of the thing is a payback period. I understand this program is a 48-month program and is the payback period already determined or not? The second thing is about the upload of the assurance of the transparency. Could you briefly explain the IMF approach to assure the transparency of the debt? Thank you.
MS. YAN: Thank you. Peter, Masahiro, there are also two questions in the chat you will see one from Archana, a clarification on the IMF loan provide fiscal budget support and also from Dinesh on the financing insurance. So there are many questions, so let’s try to address them briefly and as many as possible. Thank you.
MR. NOZAKI: Thank you. So yes, let me address the question on governance diagnostic. Yes, this is the first one in Asian pacific. However, the IMF has focused on governance and anti-corruption issues, which is macro-critical, since 2000, many years ago, and then recently rebuffed its effort in 2018. And there are governance diagnostic done in several other countries. And then there is a link to the website on this past Governance Diagnostic Report. Yes, I’m trying to look for the countries, but maybe it’s quicker for you to look at the link. We have annex seven in the Staff Report focusing on governance diagnostic and anticorruption. And there is a footnote too in that page.
And on the budget support, the IMF financing can be used to ameliorate funding pressure for the government. So for the government, the government can transform the IMF disbursement into rupee and then you start for government expenditure or repaying government loans, for example, Treasury Bill and Treasury Bond. That will ease the pressure, funding pressure, for the Sri Lanka as well, so that the more stable funding condition for the government can be achieved. So maybe okay, maybe I’ll turn to Peter and then yeah, and then I can also address any remaining questions.
MR. BREUER: Thank you. So on the repayment period, so the Extended Fund Facility has repayment periods ranging from 4.5 to 10 years. And there is a table in the Staff Report, table 7 on page 49, that gives the profile of repayments to the IMF from Sri Lanka and that includes repayments from the proposed — from the program that was just approved, as well as outstanding balances. Debt transparency is very important in order to actually get creditors to agree to a debt restructuring. And in this context, the commitment in the open letter that the president has written to official bilateral creditors includes a very strong commitment to transparency. So that will bode well for the negotiations, and indeed sometime ago in the fall, the authorities have already posted on their website all of their external loans on a loan by loan basis and they have assured creditors that this is all of the external debt that they have. So there have been strong efforts in this regard.
India’s role? Well, it would be the same as any other creditor country. India is one of a number of official bilateral creditors and official bilateral creditors have, including India, have given their assurances that they will negotiate a debt treatment with Sri Lanka that is consistent with restoring debt sustainability under the IMF program. And then of course, India, just like other countries, is also a member of the IMF and playing an important role there.
I see the question that Ting pointed us to in the chat on no financing assurances have been given by domestic debt holders. Will the IMF deem it fair that total debt is reduced without including domestic debt stock? Treasury interest rates have been inflated as of late. So as I mentioned, it is up to the authorities to decide how they will meet the debt targets that we talked about earlier in this conference. Of course, what matters a lot is that reaching these targets should not cause more damage than it does good. And so it will be very important to pay close attention to financial stability. So announcing this debt restructuring strategy sooner rather than later will also hopefully help address the concern of the high treasury interest rates at the moment and the authorities have committed to do so by end April. Let me stop here. I’m not sure whether we now skipped a question, but Ting will keep us on track.
MS. YAN: Thank you, Peter, Masahiro. It’s getting late here and I see we still have many questions. I don’t think we will be able to answer all the questions tonight. But let me take two last questions. One from Al Jazeera, and also Asantha from EconomyNext. Asantha and Minelle, please go ahead.
QUESTIONER: Thank you, Ting. You’ve mentioned about corruption and about safeguards in terms of preventing corruption, you talked about the diagnostic mission. But we’re already seeing the disbursement of the first tranche, I believe Peter said within the next two days or so. As much as the work to prevent corruption is a sort of a work in progress, how do you ensure that the monies disbursed in the meantime are properly utilized and not abused?
QUESTIONER: The way the budget financing is done, is it likely to impact change reserve money in any way? And also how will it impact your NIR target flow you have given? And this debt sustainable — debt is sustainable based forward looking? Did you say it on the basis of official assurances only? Or is it also because on the unsolicited letter given by the private creditors and there’s also among some private creditors, I understand that they are unhappy about the GDP projections and that’s how it impacts the GFN in the future if the GDP is low and there’s some talk of using a downside bond. What is your view on that? And also in the program there’s a prohibition on monetary financing but the new law specifically provides for provisional advances. So how do you view that?
MS. YAN: Thank you.
MR. BREUER: Okay, thank you very much. So, on the debt sustainability question; so the fact that official bilateral creditors have given their assurances that they will negotiate a debt treatment consistent with restoring debt sustainability is a key part of judging that debt will be sustainable on a forward looking basis.
When it comes to commercial creditors, the policy requires a different standard. It doesn’t require these assurances, although that letter that you mentioned was of course helpful. But there the standard is more based on good faith negotiations, so it’s more on process rather than substance. There are sort of some questions such as have the authorities engaged in discussions or negotiations with their creditors on a good faith basis? Have they given them an opportunity for input? Those type of questions and so those were assessed or have been satisfied for now. And then of course, now that the program has been approved, there’s nothing in the way of commencing the negotiations also with commercial creditors.
So the authorities will need to answer some of these questions that you mentioned may be coming from commercial creditors with respect to GDP projections or is there room to use state contingent instruments. So it’s really up to them to find some kind of instrument that works for both parties. So yeah. Masahiro, do you want to take the other questions?
MR. NOZAKI: So one by one. First of all, whether the funding from the IMF can be properly used. So this is a very important question and it’s core of the reform. So we free share that. There’s an important — importance to improve the fiscal institutions, in particular public financial management, which is to improve how the public money is spent either from tax revenues or financing from lenders like us. So even if although it is difficult to have the reform in short period of time, it takes some substantive amount of time, it is important to improve PFM functions. And then the program envisages new PFM law which clearly formulate the budget formulation process, role of responsibilities of ministry of finance and spending agencies and also include revamped fiscal rules that should be now effective and binding.
And that is one example. And another example is that the commitment control, expenditure control potentially through e-procurement and improvement in public investment efficiency by improving appraisal of a capital project, these are all envisaged in the program to improve fiscal institutions.
The budget, financing and so on. Maybe I would like to avoid some technical answers, but to say that the budget support is trying to ameliorate the adjustment needs of Sri Lanka or ameliorate the funding pressure for the government to ensure that the government doesn’t have to resort to abrupt spending tightening. So in that sense that helps manage the economic adjustment.
And last thing again, on the Central Bank Act, the important objective here is to abandon the central bank financing of fiscal deficit. That has been the case in Sri Lanka preceding some abundance of payment difficulties and then that is the case in the current episode of the crisis. So moving away from monetary financing and increasing enhancing autonomy of the central bank is very important for price stability and macroeconomic stability. Thank you. I’ll stop here.
MS. YAN: Thank you so much Peter and Masahiro, and thank you everyone for joining this press briefing. We are running out of time and I see we still have many questions unanswered, but we will be posting this video shortly after this, and then we will also post a transcript of the briefing tomorrow DC time. Thank you again everyone and enjoy the rest of your day. Thank you.
MR. BREUER: Thank you so much.