Abstract
This paper examines Sri Lanka’s Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF), and a Request for an Extended Arrangement. In line with the Poverty Reduction Strategy Paper (PRSP) and building on the progress made under the Stand-By Arrangement (SBA), the PRGF-Enhanced Fund Facility (EFF)-supported program aims to accelerate economic growth and reduce poverty. The IMF staff recommends extension to the obligations schedule of SBA repurchase expectations arising during July 2003–June 2004.
April 18, 2003
1. This statement provides an update on recent economic and political developments and policies since the staff report was issued on April 2, 2003. The information contained in this statement does not alter the analysis or the appraisal in the staff report.
2. The authorities have completed the program’s prior action—bringing to a point of sale the state’s shares in Sri Lanka Insurance Corporation (SLIC). On March 28, the government submitted to the cabinet the final sales and purchase agreement with the chosen buyer—a consortium led by the Distilleries Group—for 90 percent shares in SLIC. Subsequently, on April 3 the cabinet approved the sale. The entire privatization receipts are expected by early-May.
3. On the economic front, activity has continued to recover, while inflation has moderated. Provisional data for Q4 2002 shows that the economy grew by 6¼ percent (y/y), reflecting higher export volume and increased agricultural production, bringing growth for the year to 4 percent (higher than the previous estimate of 3 ⅓ percent). After rising in December-January, inflation declined to below 8 percent in March, reflecting increased agricultural supplies, on track to meet the end-year target of 7 percent.
4. The trade deficit widened slightly in January—reflecting, in part, the impact of the Iraq war—but the overall external position remained stable. In January, exports grew by 11 percent (y/y), but were more than offset by increased imports. Tea exports, however, fell by 10 percent (y/y) in value, due to lower prices and weak demand from Iraq—a major importer of Sri Lankan tea. Tourist arrivals appear to have moderated recently, due to the Iraq war and, at least in part, the SARS outbreak. Somewhat surprisingly, continued inflow of remittances and donor funds helped net international reserves to rise to $1.35 billion by end-March—$65 million higher than the program’s indicative target. The rupee has remained stable in real effective terms.
5. The fiscal position appears broadly on track. Preliminary data indicate net domestic financing (NDF) for February at Rs 19 ½ billion, in line with the Rs 29 billion end-March target. Revenue for January-February has performed well, reflecting increased economic activity and the extension of the VAT to financial services. Public corporations’ bank debt declined about Rs 1 billion in January.
6. Monetary aggregates have evolved broadly as projected— the end-March 2003 reserve money target was met, and net domestic assets (NDA) of the CBSL and broad money growth are also in line with program expectations.
7. The Bank’s Executive Board approved the Country Assistance Strategy for Sri Lanka and endorsed the joint Bank-Fund Staff Assessment of the PRSP on April 1. Bank Directors commended the solid progress made on the peace front and considered the PRSP to be a strong vision for regaining the reform momentum and fighting poverty.
8. Peace talks between the government and the Liberation Tigers of Tamil Eelam (LTTE) continue to progress. Despite skirmishes, both sides have reiterated their commitment to the peace process during the recent talks in Hakone, Japan. Further rounds of talks are planned for May/June—fiscal federalism, its constitutional implications, and human rights issues are expected to dominate the agenda. Consistent with the LTTE’s intentions to participate in mainstream politics, the government and the LTTE have also announced that local government elections will be held in the North and East this year.
9. The authorities recently completed a needs assessment for the conflict-torn North and the East, with help from the AsDB, World Bank and the United Nations. The United States Department of State hosted a seminar in Washington on April 14, attended by management, to discuss the progress on the peace talks and the overall development financing needs, including for the North and East. The preliminary financial requirement for post-conflict reconstruction totals about 7 percent of GDP during 2003-08. The program already includes ½ percent of GDP of such expenditure annually, and foreshadowed that additional spending could be needed. In light of the debt burden, the additional spending would need to be financed largely by grants and highly concessional donor funds. The macroeconomic framework will need to be revisited to reflect implementation capacity and the financing details of post-conflict spending after the donors meeting in Tokyo in June.