SECOND TRANCHE UNLOCKED

Tamara Rebeira evaluates the IMF programme amid our fiscal balancing act

Sri Lanka heaved a sigh of relief as the IMF finally reached an agreement with the authorities to release the second tranche of bailout funds. This tranche, valued at US$ 330 million, had been held since October because Sri Lanka and the International Monetary Fund failed to agree on the terms for its disbursement.

The IMF withheld the second tranche due to a revenue shortfall of approximately 15 percent, a contraction of 3.1 percent in Sri Lanka’s real GDP and subdued growth momentum. It stressed that tax and revenue collections must improve since they fell short of the lender’s expectations.

The staff-level agreement is subject to various conditions, one of which involves conducting financing assurance reviews. These reviews will evaluate the progress achieved in debt restructuring – and its alignment with the programme’s debt targets.

According to the IMF, a critical element of Sri Lanka’s economic revival is the successful negotiation of agreements with official creditors regarding debt treatments that align with the programme’s guidelines and debt objectives. Any delays in this process could dampen our economic prospects.

In a positive move in October, Sri Lanka unveiled an arrangement with China’s Exim Bank to restructure a massive debt of 4.2 billion dollars. China also expressed its commitment to actively collaborate with Sri Lanka to relieve the debt burden and facilitate sustainable development.

The recent IMF statement read: “The authorities remain committed to the ambitious reform agenda under the EFF (Extended Fund Facility) and their reform efforts have been commendable, including rapid disinflation and a significant fiscal adjustment expected by the end of this year.”

It continued: “Programme performance at end-June was satisfactory with all quantitative performance criteria for end-June met, except the one on expenditure arrears. All indicative targets were also met except the one on tax revenues. Most structural benchmarks were either met or implemented with delay by end-September 2023.”

Sri Lanka’s economy is currently exhibiting signs of stabilisation with a noteworthy reduction in inflation from its peak of 70 percent in September 2022. There’s also been a notable increase of US$ 1.5 billion in gross international reserves during the March-June period of this year.

However, despite these early signs of stability, the prospect of a complete economic recovery remains uncertain as the high cost of living – despite falling inflation – shows no signs of abating. To make matters worse, the proposed hike in value added tax (VAT) to 18 percent in the new year may put paid to any relief from the cost of living burden in the near term.

Towards the end of October, the government announced an increase in the goods and services tax (GST) with substantial hikes in taxes and reductions in consumer subsidies in line with the IMF’s rescue plan. A government spokesperson justified this move by citing the need for another tax increase, as the IMF withheld the US$ 330 million tranche due to the shortfall in tax revenue.

At the same time, the president has taken a firm stance on the heads of the Inland Revenue, Excise and Customs Departments for their failure to meet revenue targets. He questioned why only an estimated 500,000 tax files are in existence!

The challenges and opportunities that surround an economic recovery are multifaceted and dynamic. Recent agreements with international financial institutions and measures taken by the government indicate a commitment to addressing the country’s financial issues though the road to a complete recovery remains uncertain.

As Sri Lanka navigates these complex economic waters, it’ll be essential to strike a balance between stabilising the economy and ensuring the welfare of its citizens while fostering sustainable development. Our success depends on the ability to adapt to changing circumstances, and embrace comprehensive reforms that promote growth and prosperity in the years ahead.