While one may assume the hardest task for debt-ridden Sri Lanka lay in securing International Monetary Fund (IMF) Executive Board approval for the Extended Fund Facility (EFF) programme, local economists say the real hard task is proceeding with the challenges the programme came with. 

Speaking to The Sunday Morning, University of Colombo Department of Economics Senior Lecturer Dr. Shanuka Senarath stated that receiving the first tranche of $ 333 million under the EFF did not mean that Sri Lanka was out of its unprecedented economic crisis. 

“The EFF loan is merely $ 2.9 billion, which is just a signal that the IMF is working with Sri Lanka; it does not mean it is the end of the economic crisis or that Sri Lanka is out of the crisis. Sri Lanka has to plan and implement a framework to overcome the crisis. That is the challenge,” Senarath stated. 

According to Senarath, Sri Lanka still has to make progress in restructuring the economy, restructuring domestic debt, and completing external debt restructuring. 

In addition to this, Sri Lanka is also bound by the Staff Report of the IMF EFF to Sri Lanka to embark on a few financial commitments while also developing the monetary structure of the country and working on the debt to Gross Domestic Product (GDP) ratio. 

Senarath stated that if Sri Lanka was to navigate through these challenges, it should make sure to earn more than it spends. His suggestion to achieve this was to understand financial trends around the world and get the country to participate in the global economy abundantly. 

“The real challenge for Sri Lanka is to increase the earnings now, because it is frustrating to take a loan to pay for another loan. We have seen countries that cannot pay even the IMF loan they borrowed. We need to make sure that does not happen to us,” Senarath explained. 

Key measures

There are numerous tasks and conditionalities the Sri Lankan Government is bound to follow and implement under the Staff Report, including a number of key measures that the Government has to implement within the year. 

One of them is the local authorities committing to clear all their outstanding spending arrears by the end of June and another one is the implementation of a Social Security Net (SSN) programme with a floor spending amount of Rs. 187 billion. Beyond 2023, the Government has to maintain SSN spending at a minimum of 0.6-0.7% of GDP.  

According to the IMF, parliamentary approval for the welfare benefits payment scheme and application of the new eligibility criteria has to be obtained by May 2023, which will allow the Welfare Benefits Board (WBB) to start selecting SSN beneficiaries using the new eligibility criteria. 

Furthermore, by January 2024, beneficiaries who are ineligible according to the eligibility criteria should no longer receive Samurdhi cash transfers. These reforms will reportedly be assisted by the World Bank and will help ensure that the SSN is well-targeted and covers all eligible low-income and vulnerable households.

Enacting a new Public Financial Management (PFM) law, which clarifies the budget process, specifies the roles of Government agencies, and includes a revamped fiscal rules framework, will have to be submitted to Parliament by December 2023.

Completing the rollout of the Integrated Treasury Management Information System (ITMIS) by September 2023 is also another challenge the Sri Lankan Government has to face this year.  

More importantly, the authorities, assisted by their advisors, will have to continue to engage with staff on their scenario analysis and make an announcement on the coverage and parameters of the external and domestic debt operations before end-April 2023. 

Sri Lanka also has in place measures that give rise to eight exchange restrictions and seven MCPs, adopted new Capital Flow Measures (CFMs), and tightened existing CFMs during the pandemic and recent crisis.

Import restrictions, exchange restrictions, and multiple currency practice-related measures should have to be phased out as the Balance of Payments (BOP) stabilises. To this end, by June 2023, the authorities will have to prepare a plan for the phased removal of these measures during the programme period that will be conditioned on progress in achieving macroeconomic stability.

New Central Bank Act 

The new Central Bank Act that was approved by the Cabinet in December 2022 is expected to receive Parliamentary approval by April 2023. By July 2023, the CBSL will have to develop a roadmap for financial sector restructuring and recapitalisation to address capital and forex liquidity shortfalls identified through the diagnostic exercise and to intervene in banks assessed to be non-viable. 

By October 2023, the Government will have to determine conditions for any potential use of public funds to support the roadmap and to close capital shortfalls at viable banks. 

Cabinet and Parliamentary approval for the full revision of the Banking Act too has to be done this year. 

Financing

Until 2026, external financing has to be limited to financing from official sources, in line with programme assumptions. 

During the programme years (2023-’27), official programme financing includes about $ 3 billion from the IMF over four years and $ 3.75 billion from other multilateral institutions. Project loan disbursements are assumed to decline to $ 1.4 billion in 2023, as most bilateral lenders have scaled back their disbursements following the debt moratorium. 

The Government of Sri Lanka is also required to publish audited financial statements of all 52 major SOEs for 2021 and for 2022 by end-June 2023. A new Social Registry – an electronic database of applicants for welfare programmes – will need to be operationalised by May 2023 and new eligibility criteria for targeted cash transfers developed with technical support from the World Bank.

Further, the Government is required to establish a public debt management agency by December 2023 and complete the establishment of the agency by December 2024.

Using the money wisely

Speaking to The Sunday Morning, University of Kelaniya Department of Economics Prof. H.M. Nawarathna Banda stated that the challenge for Sri Lanka now was deciding where to put the first tranche of $ 333 million. 

“What we have received is a loan, not a grant. Hence, we have to pay that back along with interest. If we are using that money for consumption purposes then, we cannot pay back the loan. Hence, we need to utilise it for investment purposes that will provide the country with returns,” Banda stated. 

However, State Minister of Finance Ranjith Siyambalapitiya on Friday (24) stated that $ 120 million of the first tranche had been used to settle a credit line taken from India, as the ministry was of the view that “it is important to follow debt repayment”.

Speaking further, he noted that examples of the aforementioned rule were developing the tourism sector, agricultural sector, Small and Medium Enterprises (SMEs), and foreign employment and then using the money these sectors generate for good purposes. 

Further, he stated that the Government of Sri Lanka should learn to use the IMF money wisely and follow the conditions set by the IMF. 

“The IMF has told Sri Lanka to privatise SOEs and cut down welfare in the country. We have to adhere to these conditions or we will not get another tranche. We will have to look for private investments as well. The economy should be expanded so that people can take part in it,” he added.