Sri Lanka will vote for its ninth executive president on 21 September after two-and-a-half years of political turmoil and economic crisis, but given that the country is in agreement with the International Monetary Fund (IMF) for an Extended Fund Facility (EFF), uncertainty prevails over the future of the programme under a new government.

A team from the IMF will be visiting Sri Lanka next week in relation to economic progress and to meet the various stakeholders in the economic engine of the country. The Sunday Morning decided to look into the post-polls future of the IMF programme.

IMF team to discuss economic progress

Speaking to the media on Monday (22), State Minister of Finance Shehan Semasinghe said that a delegation representing the IMF would visit Sri Lanka in the last week of July and that it was expected to discuss the progress of the economy, future decisions, and areas that needed further strengthening.

“We must now prepare for the third review with the successful completion of the IMF second review,” he said. However, he noted that the upcoming meeting was not related to the third review. 

He said that the authorities expected to maintain the economic stability that the country enjoys at present as the growth momentum expected in the first quarter of 2024 was expected to continue throughout the year.

“While many reports and forecasts predict only 2% growth, we aim to achieve a growth rate of 3-3.5% this year,“ he said, adding that authorities hoped that economic activities would proceed uninterrupted during the upcoming election cycle 

He added that, if undisturbed, Sri Lanka was expected to achieve an economic growth of 3.5% this year.

SL has failed to meet some IMF requirements 

Speaking to The Sunday Morning, Verité Research Lead Economist Raj Prabu Rajakulendran said that the IMF team would visit Sri Lanka to look at the progress so far in the programme as there were new commitments that had come in from the second review.

He said that the IMF team would be in Sri Lanka to also look at the revenue progress over the past six months. However, he added that forecasts for Sri Lanka based on the performance so far would only be released at the end of the next review.

Rajakulendran said that Sri Lanka was yet to meet certain commitments of the programme such as the publishing of the audited annual reports of State-Owned Enterprises (SOEs), which were originally supposed to be published by the end of 2023.

“Some of the new commitments added to the programme after the second review have to be met before the end of 2024,” he said.

Sri Lanka has met 27 structural benchmarks so far

Out of the 51 structural benchmarks of the IMF programme, Sri Lanka had met 27 structural benchmarks by the completion of the second review in June.

The structural benchmarks which should be met before the end of 2024 include the following: 

• Obtaining Cabinet approval of the Fiscal Strategy Statement (FSS) containing a medium-term fiscal framework by the end of June 
• Cabinet approval for revenue measures requiring legislative amendments to support fiscal consolidation during 2025, in line with programme parameters by end-June 
• Fully operationalise the Bulk Supply Transaction Account (BSTA) by adopting the rule requiring the regulator to use it to determine the cost-recovery-based electricity tariff and Government transfer requirement by end-June 
• Collect information from a representative sample of 5,000 standard properties that include key variables, including annual values, latest assessment date, and property type, of all properties in all municipal councils by the end of August 
• Obtain Cabinet approval for a prioritised, time-bound, and costed Information Technology (IT) Strategic Plan to deliver RAMIS version 3.0 with the needed functionality enhancements and design improvements by the end of August 
• Obtain Cabinet approval for the repayment schedule of the Ceylon Electricity Board’s (CEB) legacy debts, starting in April 2025, by December 2024
• Publishing of asset declarations for senior officials in line with the Anti-Corruption Act by end-July 

SJB ready to talk changes with the IMF 

Speaking in Parliament on Thursday (25), Samagi Jana Balawegaya (SJB) MP Dr. Harsha de Silva said that a future SJB government would change the current IMF programme.

“We discussed at length with Peter Breuer [IMF Senior Mission Chief for Sri Lanka] that several conditions should change in the IMF programme,” he said.

Moreover, he said that the IMF had already asked for a meeting with the Opposition Leader [Sajith Premadasa] and the SJB economics team when the IMF delegation visited Sri Lanka in the coming week.

“We are not against working with the IMF but we cannot agree with the overall conditions of the programme,” de Silva said.

He said that there were many issues in the agreement signed with the IMF which needed to be resolved, adding: “We expect to tell them the changes that we will make to the IMF programme in an SJB government at the meeting with the IMF in the coming week.”

NPP disagrees with taxes brought about by IMF 

Speaking in Parliament on Thursday (25), National People’s Power (NPP) MP Vijitha Herath said that conditions imposed by the IMF had led to taxing people, thereby imposing a heavy burden on the people, which the NPP had not agreed to.

He said that these tax increases had led to a subsequent surge in the prices of goods, electricity, and fuel, collectively increasing the cost of living.

He added that the agreement which the Government had entered into with the IMF had come into effect without the consent of the people: “The people did not give a mandate to agree to such conditions.”

In a statement issued earlier, the NPP said that it would continue with the IMF programme in a future government following a review of the existing conditions.

Another debt assessment if targets change

Speaking to The Sunday Morning, Frontier Research Senior Macroeconomist Thilina Panduwawala said if a future government wanted to adjust the primary surplus target of the IMF, then the IMF would have to do an overall debt assessment as the dynamics would change when assumed for a 2.3% surplus as opposed to a 1.5% surplus.

“In that case, there will be an adjustment as there are other targets that need to be adjusted to this change,” he added.

Panduwawala said that it was possible that the IMF would retain the targets for convenience but change other targets the Government had to meet if the primary adjustment was not happening.

MSMEs to meet IMF to raise concerns?

President Ranil Wickremesinghe at a forum with Micro, Small, and Medium Enterprises (MSMEs) said that he would arrange consultations with representatives of the IMF team visiting Sri Lanka in the coming week to discuss the issues faced by them.

“In the recent past, the country’s economy faced a severe collapse, impacting all businesses, particularly small enterprises, and causing widespread losses. There have been many questions from you [the MSMEs] about the recent challenges. We need to find solutions based on this context,” Wickremesinghe told a gathering of over 500 MSMEs on 19 July.

The President said that as a first step they should hold discussions among themselves, review the situation, and list down concerns before their meeting with the IMF.

Debt restructuring 

The Official Creditor Committee (OCC) and China EXIM Bank arrived at a debt deal with the Sri Lankan authorities in late June to restructure about $ 10 billion in bilateral debt.  

In the agreement, Sri Lanka has managed to reduce the interest payments of the debt significantly, with interest rates allowed to be maintained at 2.1% or below.

The bilateral creditors have agreed to extend the repayment period of the debt by eight years, after starting repayment in 2028 and completing it by 2043.

Sri Lanka expects to save $ 5 billion in outflows through the reduced interest payments agreed with the bilateral creditors.

The deal that was agreed between the Ad Hoc Group of Bondholders and authorities has proposed a 28% haircut on the principal of the existing bonds of $ 12.5 billion, while a haircut of 11% is proposed on the past due interest which is about $ 1.9 billion.

The proposal has presented a step-up coupon structure which is what was anticipated and which has differences in treatment up to 2027 and from 2028 to 2032 as well as from 2033 onwards.

There is also a five-year maturity extension where the payments for the existing bonds will start in March 2029 until 2038. 

If the deal goes through the IMF Debt Sustainability Analysis and comparable treatment by official creditors, Sri Lanka will begin principal payments from March 2025 onwards while the coupon payments will happen biannually.

The debt service payments for the International Sovereign Bond (ISB) holders average about $ 720 million to $ 750 million from 2024 to 2028. Thereafter, as a result of the step up in the coupon and the maturities, the payments will increase to over $ 1 billion from 2029 onwards.

Sri Lanka has to make total payments adding up to $ 724 million by the end of 2024, which includes a consent fee of $ 225 million to be paid upfront upon finalisation of the debt restructuring agreement and maturity of $ 291 million and coupon payments of $ 208 million.