• Govt. will honour welfare, salaries and pensions
• Sri Lanka and creditors not in a standoff
• No fourth round of creditor meetings planned
• Confident of IMF Board approval in Q1 ’23
• Reforms needed, Govt. must be regulator not businessman
• Reducing contraction to 3%, envisages growth by 2025
• Confident of energy crisis management with $ 400 m reserves
• Bridge financing only likely after IMF EFF and ratings review

Sri Lanka is not yet out of the woods, with the recovery from an unprecedented economic crisis being slow, State Minister of Finance Shehan Semasinghe said, while warning that the coming months and years were likely to remain challenging.

This, as Sri Lanka now anticipates the expected $ 2.9 billion International Monetary Fund (IMF) Extended Fund Facility (EFF) assistance programme to be approved in the first quarter of this year and not by end of January as previously thought – an outcome some analysts had predicted last year.

Minister Semasinghe told The Sunday Morning that despite usable national reserves being around $ 400 million, the Government was confident that the energy crisis would not take a turn for the worse like experienced during last year’s dry season, stressing that cost-reflective tariffs for utilities were unavoidable.  

In an interview with The Sunday Morning, Semasinghe said the Government would honour mandatory payments such as the salaries of the bloated State sector, pensions, and welfare schemes, despite concerns being raised last week about their ability to honour them. The State Minister also downplayed the impact of the proposed 5% State expenditure cuts announced last week on key sectors like health, education, and welfare.

Following are excerpts of the Interview:

Minister of Transport and Highways and Minister of Mass Media Dr. Bandula Gunawardena last week announced a 5% reduction in State expenditure. How much will that amount to?

I cannot exactly quantify the range as of now (11), but we know the Budget [2023] estimates for expenditure were for Rs. 5,819 billion. However, the 5% does not mean a certain quantum of that figure. What we mean is that the Government cannot move on the basis that mandatory expenses cannot be touched. 

One breathing space the Government has on expenditure reduction is capital expenditure but that too has been contained significantly by the Budget. In terms of expenditure reduction, it is essential for us to ensure that no non-essential payments are initiated by any State entity so it’s that reduction that we want; we want this adopted as a policy, even though it will be tough for us as a Government.

We have already informed all ministries to be diligent on expenditure and not to be extravagant. This is what the Minister [Gunawardena] tried to emphasise. This is a very difficult situation for the Government. The Treasury is going through a very hard and challenging period. As of now, we are managing those challenges. There are mandatory payments which the Government cannot avoid.

The wages bill for the State sector is about Rs. 93 billion per month, pensions Rs. 25 billion, and welfare schemes including Samurdhi come to Rs. 10 billion. These are the mandatory payments that the Government cannot avoid. Even with these, we are finding it difficult but we are managing. We are confident that we can continue. With the tough measures the Government is putting in place, the situation has stabilised to a reasonable level, but not an ideal level. The country will gradually stabilise better. By the end of the year, we expect better stability.

However, that stability doesn’t mean an end to the issues faced. The coming years will be tough too. The Government has no illusions about that.

Can the Government find adequate funds to honour welfare commitments?

Yes, the welfare commitments will be honoured by the Government. No one should be worried about that. Not only Samurdhi, but all welfare schemes will be honoured.

However, the Government is streamlining the welfare programmes as there have been complaints of its composition. That analysis is currently underway. When we called for applications, we received 3.7 million applications for welfare assistance. We want to make this an annual assessment. Once the analysis is done, the approved list will be published at the GA’s offices. If there are appeals, the GA will analyse it based on the published 22 criteria for welfare eligibility.

Anybody who doesn’t support these welfare programmes and assessments will be discriminating against the most vulnerable persons during this crisis. The World Bank, the IMF, and others are very clear that vulnerable persons need to be supported. 

How will such expenditure cuts be prioritised? Will health, education, and welfare suffer?

No, health is a prioritised sector. As I said before, we will not reduce welfare payments. Also, our priority is to make the salary bill payments, therefore it is unlikely that education will be impacted.

Is there a standoff between Sri Lanka and its creditors? Has there been any tangible progress in discussions with China and India?

No, there have been a lot of positive developments. Not only with India and China, we have even had good discussions with the Paris Club and Japan. We expect IMF Board approval by the first quarter of 2023. The dialogue we have had so far has been positive. It is progressing. I am confident that we can have IMF Board approval by the first quarter. All the creditors are in dialogue with us. There will be positive news we can announce in the near future.

How are the meetings between the Treasury and the China Development Bank and China Exim Bank going? When is the next round?

So far we have had three rounds of meetings with our creditors, starting from Washington last year and they have been very positive. As of now we don’t have any meetings scheduled.

The Treasury along with the Central Bank and our advisors are in touch with our creditors and the IMF. This is how progress is being made. We will not have delegations visit for discussions with authorities. However, they are in touch with the Treasury and Central Bank online.

Will Sri Lanka miss the January IMF Board approval deadline?

There is no hard and fast rule that says by this month or that. Of course, we tried our best to get the assurances and to complete what was required by the IMF by December. I think that was a very optimistic deadline set by us to ensure we got our process moving forward. I think that worked well for us. We had a target to aim for.

This is a complex and thorough process. Most people who comment on it are those who are not involved in the process and don’t know the workings. It is likely that we won’t get IMF Board approval this month. We plan to get it in the first quarter of this year.

There are a few people in Sri Lanka who spread misinformation about the IMF and have vested political interest in seeing this assistance programme not materialising. Some politicians – a minority – don’t want this to succeed because their political survival is based on the difficulties the public are facing. 

We [Government] know that the hard measures and the reforms we have enacted are difficult for the masses. But recovery is hard. It will be painful. We are not ignorant of that. We are also not under any illusion that everything has fallen into place, but we are pursuing the solution. We must ensure that in the long term we don’t fall back into the same situation.

If IMF Board approval for the EEF gets deferred to March, will that delay efforts to secure bridge financing?

No, it will not. At present, it is difficult to seek bridge financing while in default. Once the IMF agreement is approved, it will open new avenues for Sri Lanka. Once approval is granted, we will have other disbursements due to the debt standstill. 

I am confident that the rating agencies will look at Sri Lanka positively. Right now, our ratings are not good but we are hopeful that investors will gain confidence soon. Also, Sri Lanka will be recognised as a country that has financial discipline.

How will this affect Sri Lanka’s growth predictions?

Once the endorsement comes [IMF EFF], we can move forward in an expedited manner. In 2022, there was a contraction of -8%. Our target for this year is to reduce that to -3%. The Government is looking at growth by 2025.

The fiscal policy decisions and the measures that were put in are working. Inflation has come down. I am not saying 60% of inflation is a great amount to be happy with, but to come down from nearly 100% to 60% is an achievement.

Right now, the interest rates are high. As such, the Small and Medium Enterprises (SMEs) and monthly wage sector are suffering. These are the consequences of the crisis. An interest rate adjustment will not take long as, once the IMF facility comes in, the market will respond. Then the Government’s policies can also be relaxed to a degree.

With IMF assistance delayed and bridge financing out of reach at present, how will the Government manage our reserves?

Basically, I don’t think there is much to say about reserves. We are in this situation now because we ran short of reserves. Sri Lanka’s reserves were used to defend the rupee. That strategy failed. During Covid, our reserves came down to $ 189 million.

However, today, on forex inflows, our remittances have shown some improvement. There is improved inflow coming in from the tourism sector. Further, our exports are being maintained at a reasonable level. We can manage, but of course it will be hard.

IMF assistance will help us with investor confidence and we can expect a reduction in the curtailment of credit lines to banks. That was a serious problem, so such issues will be lessened with the IMF programme and will help us to improve the liquidity of our local banks and increase liquidity on the forex front.

With only about $ 300 million of useful reserves, how will Sri Lanka manage its energy crisis without increasing power cuts? How will the Treasury find the money for essentials like coal and fuel?

A reserve of about $ 400 million. That’s a good question. This is the issue – although the economy has stabilised, it is only to a certain extent. It is not fully stabilised. Once an economy collapses, it cannot stabilise in a few months. Although we are concerned about the reserves situation, so far we have managed to get by. There were some issues the banks also had, but the President also advised and managed to resolve the issues.

I don’t think we will fall back into a situation where we were a few months back, with queues and longer power cuts. This is why we cannot relax some of the restrictions we have enforced, because of such concerns. If we relax the restrictions faster, it may result in a fall where we may have to experience worse than what we went through last March or April. The Government is concerned about that.

For five or six months, we are without external forex, except for emergency funding. This is one reason that the energy sector needs cost-reflective tariffs. It is vital for sustainable utility supply.

Are the efforts to restructure State-Owned Enterprises (SOEs) going forward? What is going to be done about them?

At present, it is progressing slowly. The Parliament has approved some measures on the SOEs. Some SOEs may not need to be privatised, some will be merged, some restructured, and some may be removed from the role, as it is role replication. With some we have no choice but to privatise. The SOEs, particularly the loss-making ones, have over the years become an unbearable burden on the State Treasury.

The Government has expedited the process because we can’t allow taxpayer rupees to be incurred on any of the SOEs. The Government should not get into business; it should be a regulatory authority.