Context and Recent Development

1. Preexisting vulnerabilities, significant policy missteps, and major economic shocks set the stage for a full-blown crisis in Sri Lanka.

• Despite progress made under the 2016-19 EFF program, Sri Lanka’s vulnerabilities were aggravated by substantial shocks during the period, including the 2017 drought, the 2018 political crisis, and the 2019 terrorist attacks.

• Following a change in government in late 2019, unsustainable policies were implemented involving significant tax cuts and delays of anticipated reforms, which further exacerbated vulnerabilities. The government, headed by President Rajapaksa following national elections in 2019-20, pledged to develop a people-centric economy through tax policy changes to promote production and reduce the cost of living. Income tax and value-added tax (VAT) were drastically cut in late 2019, with estimated revenue losses exceeding 2 percent of GDP. The automatic fuel pricing mechanism was discontinued, and legislative reforms to enhance central bank autonomy and fiscal rules were suspended. The EFF-supported arrangement expired in June 2020 after the 6th program review was completed in November 2019.

• As a result, Sri Lanka entered the pandemic with a thin reserves buffer, high debt level, and no fiscal space. Access to international capital markets has been lost since the spring of 2020. Despite elevated foreign exchange (FX) debt payment obligations and significantly reduced FX income, externally issued bonds continued to be repaid and the exchange rate was effectively fixed from April 2021. As a result, usable gross international reserves declined from $7.6 billion at end-2019 to $1.6 billion (less than 1 month of imports) at end-2021. Given heavy reliance on tourism and energy consumption, Sri Lanka fell into a deep crisis after the severe impact of the war in Ukraine in early 2022. With reserves depleted, the authorities suspended external debt service on April 12, 2022, and formally defaulted on their international sovereign bonds (ISBs) on May 18, 2022.¹ The rupee had depreciated by about 40 percent (in dollar terms) in 3 months since February 2022. The economy contracted sharply and inflation soared. Following the authorities’ request in April 2022, IMF staff and the authorities reached a staff-level agreement on a 48-month arrangement under the Extended Fund Facility on September 1, 2022.²

2. Economic hardship ignited social unrest and political instability. Severe shortages of food, fuel, cooking gas, and daily power cuts fueled nationwide anti-government protests in March, May, and July 2022, followed by escalated violence causing deaths and hundreds of injuries, leading to the resignations of leaders and top government officials including the President and the Prime Minister. Protests subsided after the newly appointed president Ranil Wickremesinghe declared a state of emergency in late July. Access to gas and electricity has also improved somewhat, and a digital fuel rationing system has reduced queues at gas stations, though 33 percent of households are experiencing some form of food insecurity according to the World Food Program. Political vulnerabilities remain high, given elevated public dissatisfaction with alleged corruption and the hardships implied by economic reforms. The new government remains dependent on the same party in parliament that supported the previous administration. Local elections planned for early March have been postponed.

3. The recession and heightened inflation reflect the sharp adjustment under way in Sri Lanka. Real GDP contracted by 7.1 percent y/y in the first three quarters of 2022, largely driven by manufacturing and construction sectors. Latest high frequency indicators point to further contraction of industrial production and business activities. Despite weak demand, service activities are showing positive signs, with PMI in December 2022 back in the expansion territory, possibly reflecting easing fuel shortages. Inflation measured by Colombo CPI (CCPI) slowed recently on the back of falling food prices, from the peak of 70 percent y/y in September to 54 percent in January 2023. Core inflation also declined, albeit more modestly, from 50 percent to 46 percent during the same period.³ The sharp acceleration in inflation in the first half of 2022 was driven primarily by monetary financing, rupee depreciation, and global commodity price surge, followed by steady increases reflecting the second-round effects of hikes in administrative prices amid de-anchored inflation expectations.

4. The balance of payments (BOP) remains under pressure while reserves are depleted.

• During 2022, exports expanded (5 percent y/y) helped by slightly better export prices and improved competitiveness, while imports contracted (-11 percent y/y) due to lower demand after depreciation, FX shortages, and import restrictions. Remittances are slowly picking up from a low level, and tourist arrivals and inflows recovered in December 2022 to about a third of pre-pandemic levels. Following a sharp depreciation, the exchange rate stabilized at about 360 Rupee/Dollar under FX market guidance from the Central Bank of Sri Lanka (CBSL) since May 2022, despite continued FX shortages. The CBSL has announced that with effect from March 7, 2023 this FX market guidance will be eliminated.

• FX external financing remains tight. The World Bank and Asian Development Bank (ADB) continued to disburse by repurposing the existing project loans for emergency assistance. India extended emergency loans for fuel and humanitarian purposes and provided currency swaps, while payments through the Asian Clearing Union were deferred.⁴

• Gross international reserves (GIR) stood at about $1.9 billion (about 1 month of prospective imports) at end-December 2022, including unusable $1.4 billion worth of yuan deposits at the People’s Bank of China (PBOC). Freely usable reserves are insufficient to cover essential imports such as fuel and energy, even after the external debt default.

5. The 2022 fiscal balance improved on account of spending restraint, reflecting tight cash constraints. The cash primary deficit declined to 3.8 percent of GDP in 2022 from 5.7 percent of GDP in 2021 (see text table), due to capital spending restraint on the back of cash constraints and a limited degree of inflation indexation for current spending. The 2022 primary deficit was also slightly smaller than the target of 4 percent of GDP previously agreed with Fund staff. The tax revenue-to-GDP ratio increased only marginally in 2022 as gains from tax policy measures (see ¶12) were partly offset by a cyclical decline in revenue and a decrease in import-related taxation associated with the recession and import compression.⁵ Financing constraints led to broadly maintaining the size of the stock of unpaid bills of LKR 106 billion (0.5 percent of GDP) at end-December, of which LKR 60 billion are considered in arrears.⁶ Expenditure in 2022 included on-lending of a short-term loan from the government to the Ceylon Petroleum Corporation (CPC) in the amount of about 1 percent of GDP.⁷

Sri Lanka: Fiscal Outturn, 2021-22

Source: Sri Lankan authorities; and IMF staff calculations.

Sri Lanka: Fiscal Outturn, 2021-22

	2021		2022
	Act.		Act.
	Billion Rupees	percent of GDP	Billion Rupees	percent of GDP
Total Revenue and Grants	1,463	8.3	2,012	8.5
Total Revenue	1,457	8.2	1,979	8.4
Tax Revenue	1,298	7.3	1,751	7.4
Income Taxes	302	1.7	534	2.3
Taxes on property	0	0.0	0	0.0
Tax on goods & services	646	3.7	876	3.7
VAT	308	1.7	463	2.0
Excise Taxes	307	1.7	343	1.4
Other taxes & levies	31	0.2	70	0.3
Tax on external trade	350	2.0	341	1.4
Non Tax Revenue	159	0.9	228	1.0
Grants	7	0.0	33	0.1
Total Expenditure and net lending	3,522	19.9	4,473	18.9
Current Expenditure	2,748	15.5	3,520	14.9
Salaries & wages	846	4.8	956	4.0
Goods & services	169	1.0	183	0.8
Interest payments	1,048	5.9	1,565	6.6
Subsidies & transfers	685	3.9	815	3.4
Social Safety Net			142	0.6
Capital Expenditure and Net Lending	774	4.4	953	4.0
Capital Expenditure	768	4.3	715	3.0
Net Lending	7	0.0	237	1.0
Overall balance	-2,058	-11.6	-2,460	-10.4
Primary balance	-1,010	-5.7	-895	-3.8

Source: Sri Lankan authorities; and IMF staff calculations.

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Sri Lanka: Fiscal Outturn, 2021-22

	2021		2022
	Act.		Act.
	Billion Rupees	percent of GDP	Billion Rupees	percent of GDP
Total Revenue and Grants	1,463	8.3	2,012	8.5
Total Revenue	1,457	8.2	1,979	8.4
Tax Revenue	1,298	7.3	1,751	7.4
Income Taxes	302	1.7	534	2.3
Taxes on property	0	0.0	0	0.0
Tax on goods & services	646	3.7	876	3.7
VAT	308	1.7	463	2.0
Excise Taxes	307	1.7	343	1.4
Other taxes & levies	31	0.2	70	0.3
Tax on external trade	350	2.0	341	1.4
Non Tax Revenue	159	0.9	228	1.0
Grants	7	0.0	33	0.1
Total Expenditure and net lending	3,522	19.9	4,473	18.9
Current Expenditure	2,748	15.5	3,520	14.9
Salaries & wages	846	4.8	956	4.0
Goods & services	169	1.0	183	0.8
Interest payments	1,048	5.9	1,565	6.6
Subsidies & transfers	685	3.9	815	3.4
Social Safety Net			142	0.6
Capital Expenditure and Net Lending	774	4.4	953	4.0
Capital Expenditure	768	4.3	715	3.0
Net Lending	7	0.0	237	1.0
Overall balance	-2,058	-11.6	-2,460	-10.4
Primary balance	-1,010	-5.7	-895	-3.8

Source: Sri Lankan authorities; and IMF staff calculations.

6. Financial sector vulnerabilities are elevated with deteriorating credit quality, a severe FX liquidity shortage, and large sovereign exposures. Banks are expected to face large upfront capital shortfalls following the sovereign debt restructuring and additional provisioning for non-performing loans (NPLs).

• Deteriorating credit quality. Backward-looking reported capital positions of banks remained stable, with the sector’s Common Equity Tier 1 capital ratio falling slightly from 12.9 percent at end-2021 to 12.2 percent in September 2022. However, the actual capital position will decline because credit quality continues to deteriorate as the crisis deepens, with non-performing loans increasing from 7.6 percent at end-2021 to 10.9 percent in September 2022.⁸ A wider measure including loans with a significant deterioration in credit quality rose to 32 percent of loans.⁹

• Liquidity constraints. Banks continue to face substantial FX liquidity challenges. Income from their investments in FX sovereign debt has been suspended, although improving remittances and import restrictions have provided some alleviation. As a result, banks are reluctant to provide FX trade credit to importers while securing FX deposits with elevated interest rates and ad-hoc withdrawal restrictions. The government’s decision to settle maturing Sri Lanka Development Bonds¹⁰ (SLDBs) in Rupees upon request has reduced banks’ FX credit exposure to the government, but is expected to weaken banks’ FX positions. The cost of Rupee deposit funding has also risen sharply, especially for state-owned banks. Interbank liquidity is scarce and segmented, with foreign banks depositing substantial surplus funds with the CBSL. The CBSL has provided needed liquidity to domestic banks through term repos.

• Large exposure to public sector debt. Total exposure to the public sector accounts for over 40 percent of banks’ assets, including two large state-owned commercial banks’ exposures to insolvent SOEs. Market values of FX denominated sovereign securities—albeit subject to illiquid trading conditions—imply a loss of more than 60 percent of face value, partially offset by provisions of over 20 percent. Provisions on domestic currency public sector exposures are minimal.

7. The authorities have been managing the crisis with exceptional measures while making progress on reforms under the prospective EFF-supported program.

• Administrative BOP measures. FX shortages triggered the tightening of import restrictions on non-essential goods since March 2022. The authorities also tightened FX management measures (some of them giving rise to multiple currency practices and exchange restrictions) to mitigate FX shortages and depreciation pressure.

• Fuel and food support system. A digital fuel rationing system was put in place to address fuel shortage, which helped reduce queues at fuel stations in recent months. The authorities also launched the Food Security and Livelihood Restoration Emergency Assistance in August 2022 to improve access to food and protect livelihoods for the poor and vulnerable.

• Social transfers. Social safety nets (SSN) programs, including the poverty-targeted Samurdhi cash transfers, support for the elderly, disabled people, kidney patients, and the COVID-19 relief have helped to partly mitigate the adverse impact to the poor. The authorities have raised annual SSN spending from about LKR 60 billion on average before the pandemic to LKR 100-140 billion during 2020-22, and used the existing SSN delivery systems to provide emergency support. However, the real value of cash transfers eroded in 2022, especially for poorer households facing disproportionately higher inflation.

• Monetary financing. Constrained by limited market access, the government significantly increased borrowing from the CBSL to finance the budget, resulting in expanding monetary financing and contributing to elevated inflation. To rein in inflation, the CBSL has been downscaling monetary financing—purchases of government securities in the primary market have fallen from the peak of a three-month average of LKR 120 billion a month in June 2022 to LKR 43 billion a month in January 2023.

• Tax measures. As part of a comprehensive tax reform, the authorities implemented several revenue measures (see ¶12) to strengthen personal income tax (PIT), corporate income tax (CIT), and VAT.

• Energy pricing. The adoption of automatic price adjustment mechanisms for fuel and electricity in 2022 set up the framework for elimination of energy subsidies in 2023. The monthly fuel price adjustment mechanism is operational, and electricity tariffs were raised substantially in August 2022 and February 2023.

• Spending restraint. The revised 2022 budget, approved by Parliament in September 2022, reduced the primary deficit target to 4 percent of GDP from 5.7 percent of GDP in 2021 (subsequently outperformed at 3.8 percent of GDP in 2022). In addition to tax policy measures, this was achieved by reducing the capital spending envelope while making room for additional SSN spending and for transfers to the CEB to cover its 2022 losses from below-cost electricity pricing. The spending restraint helped the government to address fiscal financing shortfalls.

Outlook and Risks

8. The outlook reflects macroeconomic adjustments supported by the EFF-supported program, envisaging successful implementation of reforms and a sovereign debt restructuring that meets debt sustainability targets.

• Real GDP is projected to contract by 8.7 percent in 2022 and 3 percent in 2023, before a moderate expansion by 1.5 percent in 2024 and gradual convergence towards the growth potential of around 3 percent over the medium term. This reflects: (i) fuel shortages, power cuts, and supply disruptions of intermediate goods (including construction materials and fertilizer) in the near term; (ii) fiscal adjustment under the program, with the fiscal multiplier assumed at 0.5;¹¹ (iii) the banking sector’s limited capacity to support private sector activity; and (iv) a significant sovereign debt restructuring requiring bank recapitalization. The growth path is broadly in line with what was observed under previous crisis non-concessional IMF-supported programs and those that involved sovereign debt restructurings, with output in 2024 estimated below trend real GDP by 18 percent.

• Inflation peaked at 70 percent in September 2022 and is projected to decline towards 15 percent by end-2023 before eventually reaching the CBSL’s target band of 4-6 percent by early 2025, supported by monetary policy tightening, discontinuation of monetary financing, fiscal consolidation, along with the waning base effects from the currency depreciation and moderation of imported inflation.

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Sri Lanka: Cross-country Comparison of Real GDP Growth

(In percent, cross-country medians)

Citation: IMF Staff Country Reports 2023, 116; 10.5089/9798400238987.002.A001

Sources: IEO, 2021. Growth and adjustment in IMF-supported programs; and IMF staff calculations.

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• Sri Lanka’s external position in 2022 is assessed as weaker than the level implied by medium-term fundamentals and desirable policies (Annex I). The REER depreciated by about 5 percent in 2022 in average terms, with initial sharp real depreciation largely dialed back by soaring inflation. Going forward, the removal of the CBSL’s exchange rate guidance, the commitment to a flexible exchange rate, and ongoing disinflation will support additional real deprecation. Fiscal adjustment and export competitiveness gains from the envisaged real exchange rate depreciation will help restore a non-interest external current account surplus starting in 2023, supporting rebuilding reserves.

• Sovereign debt restructuring will restore public debt sustainability on a forward-looking basis (see ¶18 and public debt sustainability analysis (DSA, Annex II)). A preliminary contingency of banking sector recapitalization needs of around 6 percent of 2022 GDP—arising from impairments on banks’ exposures to the public sector through debt restructuring and to the private sector through adverse macro developments—is incorporated in the public DSA. The estimate is sensitive to the design of the restructuring.

9. Large uncertainty and downside risks remain. Downside risks should be mitigated by restoring confidence and macroeconomic stability, addressing key corruption vulnerabilities, and boosting potential growth through structural reforms. Contingency planning for additional policy actions is also critical (¶42).

• External risks associated with intensification of regional conflicts, supply disruptions, and renewed surge in global commodity prices could induce further exchange rate depreciation and runaway inflation. A global growth slowdown, further exacerbated by systemic financial vulnerabilities, could weigh on exports and the recovery.

• Domestic risks could arise from renewed social unrest and political instability triggered by public dissatisfaction arising from reform fatigue and alleged corruption. Sri Lanka’s weak track record for reform poses an additional risk. Given elevated upside inflationary pressure, the risk of persistently high inflation is significant (¶20). FX liquidity shortfalls or sharp deterioration of banks’ asset quality led by the sovereign debt restructuring or macroeconomic shocks could trigger banking sector stress with severe repercussion to the broader economy. Risks related to program implementation are discussed in ¶41.

• Upside risks could materialize from a faster than expected growth recovery led by stronger tourism and FDI.

Program Objectives

10. The EFF-supported program for Sri Lanka aims to restore macroeconomic stability and debt sustainability, mitigate the economic impact on the poor and vulnerable, safeguard financial sector stability, and strengthen governance and medium-term growth potential. Consistent with the IMF’s policy recommendations under the 2021 Article IV consultation,¹² the comprehensive policy package comprises: an ambitious revenue-based fiscal consolidation, accompanied by fiscal institutional reforms and stronger social safety nets and SOEs (Section A); a deep restructuring of public debt (Section B); a multi-pronged strategy to restore price stability and rebuild reserves under greater exchange rate flexibility (Section C); policies to safeguard financial sector stability (Section D); and stepped up structural reforms to reduce corruption vulnerabilities (Section E) and enhance growth (Section F).

A. Advancing Revenue-Based Fiscal Consolidation, Reforms to Social Safety Nets, Fiscal Institutions, and State-Owned Enterprises

11. Leading up to the economic crisis, Sri Lanka ran persistently large fiscal deficits, which reached 12.1 percent of GDP in 2020 and 11.6 percent of GDP in 2021. After losing international sovereign debt market access at the onset of the pandemic, financing these fiscal deficits necessitated recourse to large scale monetary financing, which contributed to the surge in inflation in 2022. These large fiscal deficits reflected substantially low tax revenues and high debt service costs, while non-interest government expenditures were not excessively high. Indeed, the tax revenue to GDP ratio was among the lowest in the world, at only 7.3 percent in 2021. This weak tax revenue performance reflected a combination of low tax rates, narrow tax bases, and low collection efficiency. To achieve needed fiscal consolidation in Sri Lanka, the program addresses all of these problems with wide-ranging tax reforms.

12. The authorities are committed to an ambitious and primarily revenue-based fiscal consolidation strategy. The 2023 budget aims to reduce the primary deficit to 0.7 percent of GDP in 2023 (quantitative performance criterion) from 3.8 percent of GDP in 2022, with tax revenue targeted to reach about 10 percent of GDP (indicative target). The program aims to improve the primary balance to a surplus of 0.8 percent of GDP in 2024 and 2.3 percent of GDP from 2025 onwards, an ambitious but feasible medium-term fiscal path. The national budgets will be consistent with program parameters and needed revenue measures will be implemented in a timely fashion (structural benchmarks). Achieving the targets entails additional revenue measures of 2.7 percent of GDP in 2024-25, combined with expenditure rationalization. The authorities are also committed to clearing all outstanding spending arrears by end-June 2023 (quantitative performance criterion).

Sri Lanka: Cumulative Impact of Revenue Measures, Relative to Unchanged Policies from 2021

(In percent of GDP)

Sources: Sri Lankan authorities; and IMF staff estimates.

Sri Lanka: Cumulative Impact of Revenue Measures, Relative to Unchanged Policies from 2021

(In percent of GDP)

Sources: Sri Lankan authorities; and IMF staff estimates.

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Sri Lanka: Cumulative Impact of Revenue Measures, Relative to Unchanged Policies from 2021

(In percent of GDP)

Sources: Sri Lankan authorities; and IMF staff estimates.

• Tax policy measures. The authorities have implemented a progressive tax reform package since May 2022, entailing: (i) raising the marginal PIT rate schedule, reducing the PIT tax-free allowance, and introducing mandatory withholding taxes starting from January 2023; (ii) raising the statutory CIT rate from 24 to 30 percent and removing almost all sector-specific CIT exemptions from October 2022; (iii) raising the VAT rate from 8 percent to 12 percent in May 2022 and to 15 percent in September 2022, and reducing the VAT registration threshold from September 2022; and (iv) raising fuel excises to yield 0.3 percent of GDP in January 2023. The adverse distributional impacts of the VAT rate hikes were mitigated by maintaining VAT exemptions on basic food items. To bring the tax to GDP ratio to at least 14 percent by 2025, the authorities commit to revamping the VAT system before 2024, by removing almost all product-specific VAT exemptions. They also commit to significantly speeding up valid VAT refunds and abolishing the Simplified VAT (SVAT) system.¹³ Finally, the authorities commit to introducing a property tax, as well as a gift and inheritance tax before 2025. These tax policy reforms focus on base-broadening and progressive measures to mobilize revenue while promoting economic efficiency and equity. They are supported by IMF capacity development (CD).

• Revenue administration reforms are needed to adapt the operations of tax collection agencies to the revamped tax system, and to boost their tax collection efficiency. To strengthen PIT collection efficiency, the authorities reinstated mandatory withholding taxes on employment income, services payments, and capital income from October 2022. To strengthen tax collection efficiency and enhance fiscal transparency, the authorities will improve the Large Taxpayer Unit, strengthen IT-based tax administration, and publish the estimated direct costs of corporate tax incentives. The reform plan will be further upgraded with IMF CD support, including a revenue administration diagnostic assessment in January 2023. In addition, the transparency of audit could be strengthened by establishing a systematic third-party information sharing with the revenue authorities and centralizing all tax audits using risk-based filters; the World Bank is providing CD support.

• Expenditure rationalization measures. The authorities will develop strategies to limit growth in the public sector wage bill and public pension spending. After a steady increase in the wage bill in recent years, high inflation has significantly reduced real current spending in 2022. The authorities have decided to restrain wage and pension increases to well below inflation in 2023. While excessive cuts to capital spending should be avoided under the program, fiscal space for capital spending will be constrained. To address this, the authorities will take measures to raise public investment efficiency and strengthen the processes to prioritize capital projects.

13. The program aims to strengthen the social safety nets (SSN) to help cushion the impact of the economic crisis on the poor and vulnerable (Annex IV). The ambitious fiscal consolidation should protect SSN spending. In addition, Sri Lanka’s SSN programs have suffered from poor adequacy, coverage, and targeting. A World Bank study found that, in 2019, only 38 percent of the poorest income quintile received targeted cash transfers under the Samurdhi program, while 12 percent of the richest income quintile received the transfers. Accordingly:

• The program will set a floor on SSN spending of LKR 187 billion in 2023 (0.6 percent of GDP, indicative target). This will allow the major four SSN programs (Samurdhi cash transfers and support for elderly, disabled, and chronic kidney disease) to mitigate inflation eroding per-household benefits. Beyond 2023, the authorities will maintain SSN spending at least at 0.6-0.7 percent of GDP.

• In parallel, the authorities will implement broader institutional reforms to improve efficiency, coverage, and targeting of the SSN. The authorities have made the Welfare Benefits Board (WBB) operational as the legal entity responsible for coordinating all SSN programs and reforms. They have also populated a new Social Registry, an electronic database of SSN beneficiaries, and obtained parliamentary approval of the new eligibility criteria for selecting beneficiaries for SSN programs. The eligibility criteria, developed with support from the World Bank, are based on objective and verifiable characteristics of households. Parliamentary approval of the welfare benefit payment scheme and application of the new eligibility criteria are expected by May 2023 (structural benchmark), which will allow the WBB to start selecting SSN beneficiaries using the new eligibility criteria. By January 2024, beneficiaries who are ineligible according to the eligibility criteria would no longer receive Samurdhi cash transfers. These reforms will 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.

14. The authorities will strengthen the core public financial management (PFM) functions. Under the current PFM framework and practice, government budgets have systematically overestimated revenues, expenditure management has been ineffective, and the fiscal rules framework has not been satisfied since its inception in 2003, resulting in budget overruns and spending arrears. To fundamentally improve the weak PFM framework, the program entails: (i) enacting a new PFM law, which clarifies the budget process, specifies the roles of government agencies, and includes a revamped fiscal rules framework, with submission to Parliament by December 2023 (structural benchmark); (ii) developing a medium-term fiscal framework to provide binding multi-year fiscal policy guidance; (iii) completing the rollout of the Integrated Treasury Management Information System (ITMIS) by September 2023 (structural benchmark); (iv) strengthening the recently established Macro-Fiscal Unit in the MOF; (v) improving public investment efficiency by strengthening the processes for project appraisal and selection; and (vi) updating fiscal reporting to the GFSM 2014 standard.

15. The authorities have introduced automatic fuel and electricity pricing mechanisms, paving the way for resolving debt overhangs and low efficiency in the energy sector. With retail fuel and electricity prices generally set below cost-recovery levels on a discretionary basis, the CPC and the Ceylon Electricity Board (CEB) made losses for years. These losses have been treated as off-budget subsidies, financed by FX loans from state-owned banks to the CPC (accumulated to 3.8 percent of GDP at end-2022) and resulting in delays in settling account payables from the CEB to the CPC (accumulated to 0.4 percent of GDP at end-2021). The resultant debt overhangs hindered needed infrastructure investments—notably, inadequate investment in electricity generation has led to a high production cost of electricity. Against this background, the program aims to depoliticize energy pricing:

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Sri Lanka: Profitability of Energy SOEs, 2017-21

Citation: IMF Staff Country Reports 2023, 116; 10.5089/9798400238987.002.A001

Sources: 2021 MOF Annual Report, CPC Product Wise Profitability Statements, CEB Financial Outturn Statements, and IMF staff calculations.

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• Retail fuel prices will be set to their cost-recovery levels with monthly formula-based adjustments (continuous structural benchmark). The authorities already established a framework to implement this. In 2022H1, retail fuel prices were raised to their cost-recovery levels through multiple large price hikes, passing through the surge in global fuel prices and the large depreciation of the rupee to consumers. In November 2022, Cabinet approved an automatic fuel pricing mechanism, based on the 2018 fuel pricing formula that was suspended in November 2019.

• The end-user electricity tariff schedule will be set to its cost-recovery level with semi-annual formula-based adjustments (continuous structural benchmark). The authorities have started implementing the tariff-setting framework under the Electricity Act. The electricity tariff schedule was increased in August 2022—for the first time in 9 years—by 75 percent on average across different types of consumers. In November 2022, Cabinet approved an automatic electricity pricing mechanism, under which the electricity tariff schedule will be adjusted on a semi-annual forward-looking basis to its cost-recovery level, without planned power cuts. Under this framework, the electricity tariff schedule was raised by 66 percent on average in February 2023.

• Despite automatic fuel and electricity pricing, retail fuel or electricity prices may temporarily fall below their costs. The gap would be considered as non-commercial obligations for the CPC and CEB that need to be recorded as government expenditure to avoid off-budget subsidies. To achieve this objective, the cost of non-commercial obligations of the CPC and the CEB will be compensated by government transfers (indicative target and continuous structural benchmarks). By December 2023, the authorities will improve the Bulk Supply Transaction Account (BSTA) used to settle transactions between generators, the transmission operator, and distributors. This would allow to accurately measure the cost-recovery based electricity tariff and government transfer requirement (structural benchmark).

16. The program will strengthen the governance of SOEs and address their debt overhangs. Beyond the energy pricing reforms, SOE reforms will include: (i) Cabinet approval of a comprehensive strategy to restructure the balance sheets of the CPC, CEB, the Road Development Authority, and SriLankan Airlines by June 2023 (structural benchmark); (ii) prompt publication of audited financial statements for all 52 major SOEs; and (iii) prohibition of new FX borrowing by non-financial SOEs with limited FX revenues. In addition, the authorities commit to further strengthen SOE governance by clarifying the mandates of key SOEs through Statements of Corporate Intent, and by reviewing the framework for selecting SOE board members.

C. Restoring Price Stability and Rebuilding External Buffers

20. Inflation reached unprecedented levels and expectations were de-anchored last year amid significant exchange rate depreciation, but there are early signs of deceleration in recent months. Sizable monetary financing, sharp Rupee depreciation, and second round effect of imported inflation contributed to rapid acceleration of headline and core inflation rates to the peak of 70 percent and 50 percent, respectively, in September 2022, unseen in the last two decades. One-year ahead inflation expectations rose from the 4-6 percent target range and peaked above 50 percent in September 2022. Although headline and core inflation rates have both fallen in recent months driven by lower food prices, underlying inflationary pressure excluding food and other energy prices remain elevated. Going forward, the waning base effect of the depreciation and commodity prices, and weak demand as the economy continues to shrink will support a disinflationary path. However, upside inflationary pressures remain due to the lagged effect of monetary financing, possible exchange rate adjustments as exchange rate guidance and FX control measures are gradually lifted, and potential second round effects from the increase in electricity prices.

21. The CBSL is committed to restoring Sri Lanka’s price stability through maintaining tight monetary stance and discontinuing monetary financing. Monetary policy will be guided by an overriding objective of reducing the headline CCPI inflation (y/y) back to the CBSL’s target band of 4-6 percent by early 2025.¹⁴ Under the program, this will be monitored through a monetary policy consultation clause (MPCC; featuring inner/outer bands of ¶1.5/3 percentage points for June 2023 and thereafter)¹⁵ and achieved through a multi-pronged disinflation strategy that includes a strong commitment to necessary monetary policy changes and discontinuing monetary financing.

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Sri Lanka: Contributions to CCPI Inflation

(In percent, y-o-y)

Citation: IMF Staff Country Reports 2023, 116; 10.5089/9798400238987.002.A001

Sources: Sri Lanka authorities, and IMF staff calculations.

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• Following the policy rate hikes by 700 basis points in April 2022 and by 100 basis points in July 2022, the CBSL raised the policy rate a further 100 basis points in March 2023 to 15.5-16.5 percent. Separately, prime lending and term repo rates have spiked due to market uncertainty surrounding a possible domestic debt restructuring, effectively tightening monetary conditions. Maintaining a tight monetary stance is warranted to bring inflation down durably towards the target, through managing inflation expectations and containing inflation persistence from compounding second round effects.

• Going forward, inflation and inflation expectations need to be closely monitored, and the CBSL should stand ready to further adjust its policy stance over the coming monetary policy review cycles (which happen eight times a year) to deliver the programed inflation path. To enhance the speed and effectiveness of policy transmission, this should be accompanied by an explicit and strong commitment by the CBSL through its routine policy communication to pursue sufficiently positive real policy rates (on a forward-looking basis) until inflationary pressures are clearly receding. This should help bring the forward-looking real policy rates steadily toward a neutral stance, informed by an estimated natural rate of interest of 2.5 percent.

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Sri Lanka: Corporate Sector Inflation Expectations

(In percent. y-o-y)

Citation: IMF Staff Country Reports 2023, 116; 10.5089/9798400238987.002.A001

Source: IMF Staff Calculations.

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• Supported by fiscal consolidation and external financing, the program will ensure that the CBSL refrains from direct financing of the budget deficit and unwinds its large holdings of treasury securities. This will be monitored through a ceiling on the CBSL’s net credit to the government (quantitative performance criterion). The CBSL’s primary T-bill market purchases and special issuances to finance the budget deficit since 2020 reached 14 percent of 2021 GDP as of December 2022. The large-scale monetary financing has compromised the CBSL’s operational independence and jeopardized its price stability mandate. Since August 2022, the CBSL has started to downscale monetary financing and plans to offload holdings of treasury securities under the program, to support a normalization of its balance sheet and help prevent excessive money expansion, with close attention to reserve money growth. Under the program, monetary financing is envisaged only in the case of a shortfall in budget support from IFIs during the first 6 months of the program.¹⁶

22. The authorities are firmly committed to allowing greater exchange rate flexibility and rebuilding international reserves.

• They are committed to restoring a market-determined and more flexible exchange rate to serve as a buffer against external shocks and to underpin the inflation targeting regime. The market guidance by the CBSL (to confine daily exchange rate movements within a pre-defined band around the weighted average interbank spot rate of the previous trading day) temporarily helped limit excessive volatility in the official FX market but has helped to keep the exchange rate effectively pegged at around LKR 360 per U.S. dollar since early May 2022. To restore a market-determined exchange rate, the authorities have announced to drop the guidance with effect of March 7, 2023.

• The CBSL will gradually rebuild gross international reserves including through outright FX purchases in the market, supported by a non-interest current account surplus, new external financing and other non-debt creating inflows, and sovereign debt relief. Meeting the program targets on Net Official International Reserves (NIR) (quantitative performance criterion) is predicated on the CBSL’s outright FX purchases on a net basis of $1.4 billion in 2023. To avoid an “on and off” approach to exchange rate flexibility and to allow the rupee to adjust to changing fundamentals, foreign exchange interventions should be (i) limited to truly disorderly market conditions, (ii) transparently disclosed to guide market expectations, and (iii) capped at an amount consistent with meeting the NIR targets.

23. The authorities have tightly restricted FX flows in response to the sharp currency depreciation and pressures on reserves, and these temporary FX control measures are expected to be unwound during the program period once conditions allow. These measures include import restrictions, exchange restrictions, multiple currency practices (MCPs), and capital flow management (CFM) measures.

• Over 2020-22, the import of many non-priority non-critical goods was suspended, which helped contain the import bill and relieved BOP pressures, but also hurt economic activity.

• Sri Lanka also has in place measures that give rise to eight exchange restrictions and seven MCPs,¹⁷ adopted new Capital Flow Measures (CFMs), and tightened existing CFMs during the pandemic and recent crisis.¹⁸

• Given acute BOP tensions and ongoing crisis, maintaining the CFM measures in the short run is appropriate. While the mentioned import restrictions, exchange restrictions, MCP-related measures and CFMs could help mitigate FX shortages in the near term, they should not be a substitute for the comprehensive policy package and ongoing macroeconomic adjustment, and should be phased out as the balance of payments stabilizes. To this end, by June 2023, the authorities will prepare a plan for the phased removal of these measures during the program period that will be conditioned on progress with achieving macroeconomic stability. In the meantime, the authorities have requested approval¹⁹ of all but one exchange restrictions and all MCPs.²⁰ Staff assesses that approval criteria are met and supports the authorities’ request for temporary Fund approval in line with Fund policy.

• During the program period, the authorities will not: (i) introduce or intensify exchange restrictions or introduce or modify MCPs; (ii) impose or intensify import restrictions for balance of payments purposes; or (iii) conclude any bilateral payment agreements inconsistent with Article VIII (continuous performance criteria).

24. The institutional framework will be strengthened to support flexible inflation targeting and greater exchange rate flexibility. Central bank autonomy will be strengthened by enacting the new Central Bank Act (CBA) with critical improvements over the current Monetary Law Act (see Annex VI): (i) strengthening the CBSL’s mandate by establishing price stability as its primary objective of monetary policy and financial stability as its other objective; (ii) buttressing its operational autonomy by preventing any form of government representation or participation on the Governing Board or Monetary Policy Board; and (iii) prohibiting the CBSL from providing monetary financing and from primary market purchases of treasury securities. The new CBA was approved by the Cabinet in December 2022, with Parliamentary approval expected by April 2023 (structural benchmark). In concurrence with the ongoing IMF CD on macroeconomic modeling, the CBSL’s macro-forecasting models will play a more prominent role in informing its data-dependent policy decisions, paving the way for a new Monetary Policy Report (that includes an in-depth analysis of forward-looking inflation dynamics) to enhance its policy communication. To further enable and support exchange rate flexibility, the authorities are committed to fostering a deeper and more liquid FX market and developing adequate systems for managing exchange rate risks.

Program Modalities

33. Type of Arrangement. Staff proposes a 48-month normal-access EFF arrangement given the structural nature of Sri Lanka’s protracted fiscal and BOP imbalances as well as the need for extensive structural and institutional reforms to support fiscal consolidation, reserves buildup, financial sector stability, and sustainable growth.

34. Access. The access level of SDR 2.286 billion (395 percent of quota or about $3 billion) is justified by Sri Lanka’s large BOP needs and the strength of the program. The program is expected to catalyze additional external support, with budget support from the World Bank and ADB in the amount of US$3.75 billion expected under the program. These resources, together with external public debt service relief, will close the external financing gap and allow Sri Lanka to rebuild its gross international reserves to about 100 percent of the ARA metric by end-2027 (text table). To ease domestic financing needs of the government, all purchases under the EFF arrangement are proposed to take the form of budget support. The external financing needs in 2022 were covered by savings from the debt moratorium ($2.8 billion), emergency support from the IFIs from repurposing of existing project loans and support from key bilateral partners, such as India (food and fuel credit lines, currency swap, and ACU balances accumulation).

Sri Lanka: External Financing Gap and Program Financing, 2022-27

(In millions of U.S. dollars)

Sri Lanka: External Financing Gap and Program Financing, 2022-27

(In millions of U.S. dollars)

View Table

Sri Lanka: External Financing Gap and Program Financing, 2022-27

(In millions of U.S. dollars)

35. Phasing. Staff proposes to phase the access uniformly over the duration of the arrangement, with semi-annual reviews following the approval (proposed schedule of reviews and purchases is in Table 8), to help sustain reform momentum throughout the program period.

36. Prior actions (PAs) and important upfront measures. The authorities have completed the following nine prior actions, to set the stage for broader reform plans, restore macro and financial stability, and regain market confidence. Three important upfront measures have also been implemented: (i) Parliamentary approval of the 2023 budget that is in line with program parameters; (ii) Parliamentary approval of necessary legislative revisions to implement the 2023 revenue measures; and (iii) update by the CBSL of the Emergency Liquidity Assistance framework for banks.²³

Sri Lanka: Prior Actions Under the EFF-Supported Program

Sri Lanka: Prior Actions Under the EFF-Supported Program

Cabinet approval of revenue measures to support fiscal consolidation during 2023, in line with program parameters

Parliament approval of a revised 2022 budget that is in line with program parameters

Submission to Parliament of the 2023 Appropriation Bill that is in line with program parameters

Cabinet approval to automate monthly retail fuel price adjustment as prescribed by the 2018 fuel pricing formula to achieve cost recovery

Cabinet approval to automate semi-annual cost-recovery based electricity price adjustment

Cabinet approval of the new Central Bank Act with amendments from the bill submitted to Parliament in November 2019 in consultation with IMF staff

Cabinet approval of Banking (Special Provisions) Act to strengthen key elements of the CBSL’s crisis management powers

Hiring by the CBSL of an independent firm to conduct banking sector diagnostic exercise based on Terms of Reference and timeline established in consultation with IMF staff

Increase monetary policy interest rates by 100 basis points to ensure forward-looking real policy rates on a firmly upward path

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Sri Lanka: Prior Actions Under the EFF-Supported Program

Cabinet approval of revenue measures to support fiscal consolidation during 2023, in line with program parameters

Parliament approval of a revised 2022 budget that is in line with program parameters

Submission to Parliament of the 2023 Appropriation Bill that is in line with program parameters

Cabinet approval to automate monthly retail fuel price adjustment as prescribed by the 2018 fuel pricing formula to achieve cost recovery

Cabinet approval to automate semi-annual cost-recovery based electricity price adjustment

Cabinet approval of the new Central Bank Act with amendments from the bill submitted to Parliament in November 2019 in consultation with IMF staff

Cabinet approval of Banking (Special Provisions) Act to strengthen key elements of the CBSL’s crisis management powers

Hiring by the CBSL of an independent firm to conduct banking sector diagnostic exercise based on Terms of Reference and timeline established in consultation with IMF staff

Increase monetary policy interest rates by 100 basis points to ensure forward-looking real policy rates on a firmly upward path

37. Program monitoring. Performance will be monitored through quantitative performance criteria (QPCs), continuous performance criteria related to external arrears and Article VIII obligations, indicative targets (ITs), and the monetary policy consultation clause (Table 1 attached to the MEFP). Considering the authorities’ capacity constraints, structural reforms will be sequenced appropriately throughout the program period. The program incorporates a comprehensive set of structural benchmarks (Table 2 attached to the MEFP), focusing on government budgets consistent with program parameters; PFM and SSN reforms; cost-recovery energy price adjustments; stronger central bank autonomy; financial sector stability; and stronger governance and anti-corruption frameworks. Reform implementation will be supported by extensive IMF CD (see CD Matrix in Annex III).

38. Lending into arrears and financing assurances. Credible and specific assurances on debt relief and financing or consent to IMF lending notwithstanding official arrears have been obtained from official bilateral creditors. The authorities are also making good faith efforts on debt restructuring with private creditors in line with filling program financing gaps and restoring debt sustainability. Further, the PBoC has indicated that it will consider renewing its swap arrangement with the CBSL in 2024 for another three years, if there is no significant situation change. With these and envisaged IFI financing, staff assesses that Sri Lanka’s program is fully financed, having firm commitments of financing for the first 12 months and good prospects for adequate financing for the remaining program period. The progress on the debt restructuring to restore debt sustainability will be assessed at each program review in the context of financing assurances reviews, with a view to completing debt operations within a reasonable time frame, normally by the first review under the Fund arrangement. The authorities have indicated that there are no arrears to international financial institutions.

Sri Lanka: Sovereign Arrears to Foreign Creditors

(In millions of U.S. dollars)

Sources: Sri Lankan authorities; and IMF staff calculations.

Sri Lanka: Sovereign Arrears to Foreign Creditors

(In millions of U.S. dollars)

	End-2022
Total	2,752
Official creditors	774
Paris Club	349
Non Paris Club, o.w.	425
China	311
India	71
Commercial creditors	1,978
Sri Lanka ISB holders	1,633
China Development Bank	338
Others	7

Sources: Sri Lankan authorities; and IMF staff calculations.

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Sri Lanka: Sovereign Arrears to Foreign Creditors

(In millions of U.S. dollars)

	End-2022
Total	2,752
Official creditors	774
Paris Club	349
Non Paris Club, o.w.	425
China	311
India	71
Commercial creditors	1,978
Sri Lanka ISB holders	1,633
China Development Bank	338
Others	7

Sources: Sri Lankan authorities; and IMF staff calculations.

• Official bilateral creditors are expected to provide debt relief that is compatible with the parameters of the authorities’ Fund-supported program. Specific and credible financing assurances in this regard have been obtained from Paris Club creditors, India, Hungary, and the Export-Import Bank of China (which holds more than 90 percent of the Chinese official bilateral claims subject to restructuring).²⁴ These creditors, in their assurances, indicated their readiness to finalize the specifics of the debt treatment in the coming months. On top of this, China also consented to Fund financing notwithstanding arrears to Chinese Government and the China Export and Credit Insurance Corporation (the guarantor for several Chinese commercial loans that are in default). Sri Lanka also owes official arrears to Iran, Kuwait, Pakistan, and Saudi Arabia. All four need more time to consider consenting to Fund financing notwithstanding these arrears. An update will be circulated to the Executive Board prior to the scheduled Board consideration. Recognizing that servicing debt on the original terms would not be consistent with debt sustainability, the authorities have committed in the MEFP and a letter to the Paris Club to resolve debt to all official bilateral creditors on comparable terms and to refrain from making payments to any of their creditors until a debt treatment can be agreed that restores debt sustainability in line with the EFF-supported program. The authorities are willing to use additional safeguards mechanisms, including appropriate form of contractual commitments such as most favored creditor clauses, acceptable to relevant creditors at the time. On the basis of the Sri Lankan authorities’ commitment noted above and the close and continuing engagement Sri Lanka has had with its bilateral creditors (including through several coordination meetings and bilateral exchanges), staff expect that remaining arrears and their associated claims will be treated on terms consistent with the program parameters and in an equitable fashion. These arrears constitute a form of financing contribution to the program prior to the restructuring. These commitments will be assessed through financing assurances reviews at each program review and the IMF disbursements are evenly phased to safeguard the Fund’s lent resources.

• Sri Lanka has been in arrears to external private creditors since the April 2022 moratorium, including $1,633 million to International Sovereign Bond (ISB) holders, $338 million to China Development Bank (CDB), and $7 million to other foreign commercial creditors as of December 2022.²⁵ The authorities, through their financial and legal advisors, are making good faith efforts to reach a collaborative agreement with these private creditors. In particular, they have engaged in early dialogue with them since June 2022, and shared relevant information through an investor presentation held in September 2022 (followed by a detailed document addressing investors’ questions) and the publication of detailed debt statistics in November 2022. The authorities’ advisors have also shared, under non-disclosure agreements with the advisors to ISB holder committees and CDB, key information presented to official bilateral creditors so that private creditors have an early opportunity to provide input on the design of restructuring strategies. The ad hoc group of ISB holders (holding about half of outstanding ISBs) issued an open letter to the IMF in February 2023 expressing its readiness to negotiate a debt relief with Sri Lanka that restores debt sustainability consistent with program parameters. Staff assesses that the good faith efforts made by the authorities, along with the assessment that prompt Fund support is considered essential for the successful implementation of the member’s adjustment program, satisfy the Fund’s Lending into Arrears (LIA) policy. Staff is not aware of private sector external debt arrears arising from the imposition exchange controls (¶23).

39. Safeguards. An update safeguards assessment was completed in February 2023. The update assessment reiterated the need to complete legal reforms for the CBSL to strengthen its mandate, aspects of governance arrangements, and its autonomy, including a monetary financing prohibition. The recommended legal amendments will be addressed by the new CBA. The CBSL’s audit and financial reporting functions are based on international standards. The CBSL’s internal control environment is anchored in a strong compliance culture, but some functions require continued modernization, including through an expanded scope of financial risk management. While the CBSL’s financial position has deteriorated during the crisis, the CBSL has started forward-looking assessment of its balance sheet with the aim of developing a medium-term plan to strengthen its financial position, supported by IMF CD.

40. Capacity to repay the Fund. Capacity to repay the Fund (Table 7), while assessed to be adequate under the program scenario, is subject to significant risks and critically contingent on the successful implementation of program measures and debt restructuring that restore debt sustainability. At end-December 2022, the Fund’s exposure to Sri Lanka stood at SDR 798 million (138 percent of quota or about 56 percent of gross reserves). Under the program, Fund credit outstanding would peak at 3.6 percent of GDP in 2026, corresponding to 12.7 percent of exports of goods and services and 27 percent of gross reserves. The EFF repurchases and charges would peak in 2031, at 2.1 percent of exports of goods and services and 3.5 percent of gross reserves. Delays in finalizing debt restructuring with bilateral and private creditors and/or weak implementation of policy commitments may erode capacity to repay and further increase risks.

Program Risks and Contingency Planning

41. Risks to program implementation are high, given adverse initial conditions, political risk, a complex debt restructuring with a potential for delay, ambitious fiscal consolidation, large downside risks to the baseline scenario, and Sri Lanka’s weak track record for reform and program implementation.

• Macroeconomic risks. Unexpected economic and financial developments as highlighted in ¶9 could deepen the crisis and complicate program implementation. Given elevated upside inflationary pressure, the risk of persistently high inflation is significant (¶20).

• Commitment to the ambitious fiscal consolidation targets and wide-ranging fiscal reforms. Historically, Sri Lanka has only had a primary surplus on three occasions, and never for more than two years; and fiscal consolidation efforts in Sri Lanka’s past IMF-supported programs were quickly reversed after the program. The size of the programmed fiscal adjustment is unprecedented for Sri Lanka, but necessary given that it started with one of the lowest revenue-to-GDP ratios in the world after previous fiscal reforms were undone. For example, large real cuts to public sector wages and public pension payments amid high inflation in 2022 could prompt a backlash against the program from current and retired civil servants.

• Finalizing a restructuring agreement with all creditors in line with program parameters could be delayed. Realization of debt sustainability risks could require broader and deeper debt restructuring, raising significant risks to financial stability given banks’ substantial sovereign exposure, which in turn implies an additional fiscal burden.

• Implementation capacity. The broad scope of proposed reforms may pose risks to the authorities’ ability to implement their multi-faceted program.

42. Contingency plans and agile policy adjustments are important in this context. Program implementation risks are mitigated by (i) support for economic reforms in principle from the business community and the Parliamentary opposition; (ii) upfront implementation of critical reform measures ahead of the program, including for revenue measures, automatic cost-recovery energy pricing, social safety nets, and central bank autonomy; and (iii) extensive CD support from the IMF and development partners. In addition, the authorities stand ready to deploy contingency measures as follows, should downside risks materialize.

• During the program, policy slippages would need to be corrected by remedial measures. For example, a delay in implementing revenue measures and cost-recovery energy pricing would require further cuts in capital spending on non-priority or low-efficiency projects to minimize adverse effects on growth; a slippage on the NIR target to unduly defend the exchange rate can warrant introduction of explicit FX intervention rules (e.g., monthly and/or quarterly FX intervention budgets built into program conditionality); and undue delays in any key structural reforms will jeopardize program reviews.

• In the near term, the lack of macroeconomic policy space severely hampers the authorities’ ability to address the downside risks. Further depreciation pressure and signs of runaway inflation would warrant an emergency policy rate hike.

• The risk of banking sector stress would reinforce the need to implement measures to adequately recapitalize the banking system, strengthen the crisis management framework, and develop a detailed contingency plan.

• Technical implementation capacity can be compensated by extensive CD support from the IMF and developing partners (see Annex III on capacity development).

• Program overperformance resulting from better-than-expected outturns should be locked in to the extent possible, to secure the program objectives. In this regard, the CBSL’s commitment to save any overperformance with regard to the NIR target is welcome.

43. Enterprise risks are high but are partly mitigated by the program design and CD support. The Fund faces three types of enterprise risks. First, financial risks arise from significant risks to Sri Lanka’s capacity to repay (¶40). Second, operational risks stemming from social unrest and socio-political tensions, which may pose risks to the operations of IMF staff missions and the field office if they escalate. Third, reputational risks would be of concern if the public perceives policies under the program as too tight, weakening public support for the program. Key mitigation measures include the authorities’ firm commitment to restore debt sustainability through public debt restructuring (¶18); upfront implementation of critical reform measures early on in the program (¶42); focus on social safety nets (¶13) and anti-corruption (¶30) as key pillars of the program; and extensive CD support from the IMF and other developing partners to help ensure timely delivery of reforms under the program.

Staff Appraisal

44. Sri Lanka is facing tremendous challenges. The country is still operating with depleted reserves and no access to international capital market, relying on exchange and capital controls, and rationalizing fuel and electricity usage. Economic and financial conditions remain fragile with FX shortages in the banking system, an unsustainable public debt, and high inflation amid a severe recession. The authorities started implementing economically and politically challenging policy actions to combat inflation, improve the fiscal position, reform energy pricing and social safety nets, and tackle corruption, setting the stage for broader reforms in bringing the economy back on a sustainable path. Swift and timely reform implementation, under strong and consistent ownership by the authorities, is critical for the success of the EFF-supported program.

45. Ambitious fiscal consolidation efforts supported by strengthened fiscal frameworks are much needed to restore fiscal sustainability and promote a clean break from past policy slippages. The revenue-based fiscal consolidation strategy is crucial and would principally help rebuild fiscal space and restore sustainability. Sustained efforts to implement these measures are key. For the fiscal adjustments to be successful, deep institutional reforms to the fiscal framework, capacity building (e.g., revenue administration and PFM), and strong ownership across the political spectrum are critical. Adhering to the automatic pricing mechanisms to ensure cost recovery energy pricing and ensuring their efficiency will be crucial to minimize fiscal risks from the state-owned enterprises. At the same time, rigorous SOE and energy sector reforms are critical to ease burden for electricity users and bring down energy costs.

46. One important priority of the program is to protect the vulnerable from the impact of crisis and policy adjustments. The authorities are committed to strengthen SSN by ensuring minimum SSN spending and improving the coverage and targeting of the SSN. The tax reform package under the program are also designed to be progressive and promote equity.

47. Commitment to the multi-pronged disinflation strategy is crucial to mitigate adverse economic and social consequences from persistently high level of inflation. The authorities have increased the policy rates and started to unwind monetary financing to reduce inflation. Further steps are needed as inflation levels remain high with signs of rising persistence, which continues to dampen demand and erode real income and wealth, particularly among the poor. To reduce inflation as guided by the MPCC, inflation needs to be closely monitored, and monetary policy needs to stand ready to act pre-emptively against entrenching inflation expectations, while being supported by fiscal consolidation and discontinuing monetary financing. In this regard, the new CBA sets a strong legal foundation to support the disinflation strategy and safeguard the credibility of the CBSL’s inflation target regime.

48. Greater exchange rate flexibility will facilitate external rebalancing and rebuild reserve buffer. Sri Lanka’s external position is assessed as weaker than the level implied by medium-term fundamentals and desirable policies. The authorities are committed to phasing out the administrative measures imposed to temporarily support the balance of payments. As the market regains confidence, the authorities will need to refrain from market intervention and allow exchange rates to adjust freely to changing fundamentals with due regard to potential disorderly market conditions and adverse balance sheet effects. In turn, a non-interest current account surplus and new external financing would help gradually rebuild reserves buffer.

49. Financial stability hinges on a well recapitalized banking system and strengthened legal framework. Informed by a thorough diagnostic exercise, banks’ exposure to the sovereign and problem loans under forbearance will need to be closely monitored along with intensified supervision. A plan with binding deadlines for financial sector recapitalization will be needed to address capital and FX-liquidity shortfalls and support the economic recovery. In the meantime, efforts to strengthen financial supervision and crisis management framework are crucial to enhance resilience and prepare Sri Lanka’s financial system for time of stress.

50. Reforms to tackle corruption, strengthen governance, and boost growth potential are critical for Sri Lanka’s long run sustainability. Developing an anti-corruption legislation that harmonizes with the UNCAC is an important step in the right direction. However, tackling corruption hinges on effective implementation of the legislation as a part of a more comprehensive anti-corruption agenda. These efforts can be supported by the findings of the ongoing governance diagnostic mission that conducts thorough assessment of the anti-corruption framework and broader governance issues along with recommendations suited in the context of Sri Lanka’s social and political environment. The authorities are also working closely with the development partners on growth-enhancing reforms including liberalizing trade and promoting female labor force participation.

51. The program faces substantial risks. The authorities’ capacity to implement an ambitious fiscal adjustment and wide-ranging structural reforms will be tested against reform fatigue and already high social discontent. Sri Lanka’s complex creditor structure could complicate the process of reaching an eventual debt resolution, potentially aggravating sustainability and stability risks while the economy has little buffers to cushion adverse economic and financial developments. These risks should be mitigated by the authorities’ strong resolve to sustain adjustments and advance reforms.

52. In view of Sri Lanka’s structural balance of payments needs and the comprehensive package of adjustment measures proposed by the authorities, staff supports the authorities’ request for a 48-month extended arrangement under the EFF in the amount equivalent to SDR 2,286 million (395 percent of quota). Staff supports the approval of all but one exchange restrictions (¶23) for a period of twelve months, as the measures giving rise to them are maintained for BOP reasons, are non-discriminatory, and are temporary. Staff supports the approval of all MCPs for a period of twelve months, as the measures giving rise to them are maintained for BOP reasons, are temporary, and don’t give Sri Lanka an unfair competitive advantage.

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Sri Lanka: Real Sector

Citation: IMF Staff Country Reports 2023, 116; 10.5089/9798400238987.002.A001

Sources: Department of Census and Statistics; CBSL; IMF Consensus Forecast Database; and IMF staff estimates.

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Sri Lanka: Fiscal Sector

Citation: IMF Staff Country Reports 2023, 116; 10.5089/9798400238987.002.A001

Sources: CBSL; Bloomberg; Ministry of Finance; JP Morgan Chase & Co.; and IMF staff estimates.

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Sri Lanka: Financial Market

Citation: IMF Staff Country Reports 2023, 116; 10.5089/9798400238987.002.A001

Sources: CBSL; CEIC Daily Database; Bloomberg Data LP; and IMF staff estimates.

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Sri Lanka: Foreign Exchange and Reserves

Citation: IMF Staff Country Reports 2023, 116; 10.5089/9798400238987.002.A001

Sources: CBSL; and IMF staff estimates.

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Sri Lanka: Monetary and Financial Sector

Citation: IMF Staff Country Reports 2023, 116; 10.5089/9798400238987.002.A001

Sources: CBSL; and IMF staff estimates.

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Sri Lanka: Balance of Payments

Citation: IMF Staff Country Reports 2023, 116; 10.5089/9798400238987.002.A001

Sources: CBSL; Haver; Ministry of Finance; and IMF staff calculations.

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^{Table 1.}

Sri Lanka: Selected Economic Indicators, 2019–2028 (Restructuring Scenario)

Sources: Data provided by the Sri Lankan authorities; and IMF staff estimates. 1/ Colombo CPI. 2/ Comprising central government debt, publicly guaranteed debt, and CBSL external liabilities (i.e., Fund credit outstanding and international currency swap arrangements). 3/ Excluding PBOC swap ($1 .4bn in 2022) which becomes usable once GIR rise above 3 months of previous year's import cover.

^{Table 1.}

Sri Lanka: Selected Economic Indicators, 2019–2028 (Restructuring Scenario)

Sources: Data provided by the Sri Lankan authorities; and IMF staff estimates. 1/ Colombo CPI. 2/ Comprising central government debt, publicly guaranteed debt, and CBSL external liabilities (i.e., Fund credit outstanding and international currency swap arrangements). 3/ Excluding PBOC swap ($1 .4bn in 2022) which becomes usable once GIR rise above 3 months of previous year's import cover.

View Table

^{Table 1.}

Sri Lanka: Selected Economic Indicators, 2019–2028 (Restructuring Scenario)

Sources: Data provided by the Sri Lankan authorities; and IMF staff estimates. 1/ Colombo CPI. 2/ Comprising central government debt, publicly guaranteed debt, and CBSL external liabilities (i.e., Fund credit outstanding and international currency swap arrangements). 3/ Excluding PBOC swap ($1 .4bn in 2022) which becomes usable once GIR rise above 3 months of previous year's import cover.

^{Table 2a.}

Sri Lanka: Summary of Central Government Operations, 2019–28 (Restructuring Scenario)

(In billions of rupees)

Sources: Data provided by the Sri Lankan authorities; and IMF staff estimates.

^1/Based on illustrative restructuring terms

^{Table 2a.}

Sri Lanka: Summary of Central Government Operations, 2019–28 (Restructuring Scenario)

(In billions of rupees)

	2019	2020	2021	2022	2023		2024	2025	2026	2027	2028
	Act			Prel.	Budget	Proj.	Proj.
Total revenue and grants	1,899	1,373	1,464	2,012	3,415	3,280	4,463	5,425	5,916	6,458	7,047
Total revenue	1,891	1,368	1,457	1,979	3,408	3,268	4,449	5,410	5,900	6,441	7,028
Tax revenue	1,735	1,217	1,298	1,751	3,130	3,005	4,154	5,090	5,553	6,035	6,589
Income taxes	428	268	302	534	912	895	1,010	1,096	1,191	1,290	1,397
VAT	444	234	308	463	912	796	1,456	1,607	1,763	1,917	2,088
Excise taxes	399	322	307	343	557	526	671	799	874	947	1,043
Other taxes on goods and services	132	31	31	70	291	297	343	372	403	437	473
Taxes on international trade	332	362	350	341	458	492	674	780	849	933	1,035
Property taxes	0	0	0	0	0	0	0	436	472	512	554
Nontax revenue	156	151	159	228	278	263	295	320	347	406	439
Grants	8	5	7	33	7	12	13	15	16	17	19
Total expenditure and net lending	3,095	3,284	3,522	4,473	5,819	5,681	6,594	7,247	7,815	8,365	8,974
Current expenditure	2,301	2,672	2,748	3,520	4,609	4,608	5,142	5,647	6,066	6,445	6,867
Wages and salaries	686	794	846	956	1,012	1,012	1,207	1,308	1,417	1,535	1,662
Goods and services	162	180	169	183	300	300	335	363	394	426	462
Subsidies and transfers	552	717	685	815	1,104	1,104	1,199	1,319	1,451	1,596	1,755
of which: social safety net transfers	…	…	…	142	…	187	201	218	236	256	277
Interest payments 1/	901	980	1,048	1,565	2,193	2,192	2,400	2,657	2,804	2,888	2,989
Capital expenditure and net lending	794	612	774	953	1,210	1,073	1,453	1,599	1,749	1,920	2,107
Capital expenditure	799	615	768	715	1,210	1,073	1,453	1,599	1,749	1,920	2,107
Net lending	-5	-4	7	237	0	0	0	0	0	0	0
Overall balance	-1,196	-1,910	-2,058	-2,460	-2,404	-2,401	-2,132	-1,822	-1,899	-1,907	-1,927
Memorandum items:
Central government primary balance	-295	-930	-1,010	-895	-211	-209	268	835	905	981	1,062
Central government debt 1/	13,142	15,158	18,082	27,872	…	29,856	34,084	37,512	40,216	41,608	44,601
Nominal GOP (in billion of rupees)	15,911	15,840	17,686	23,688	30,320	29,852	33,533	36,326	39,362	42,634	46,154

Sources: Data provided by the Sri Lankan authorities; and IMF staff estimates.

^1/Based on illustrative restructuring terms

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^{Table 2a.}

Sri Lanka: Summary of Central Government Operations, 2019–28 (Restructuring Scenario)

(In billions of rupees)

	2019	2020	2021	2022	2023		2024	2025	2026	2027	2028
	Act			Prel.	Budget	Proj.	Proj.
Total revenue and grants	1,899	1,373	1,464	2,012	3,415	3,280	4,463	5,425	5,916	6,458	7,047
Total revenue	1,891	1,368	1,457	1,979	3,408	3,268	4,449	5,410	5,900	6,441	7,028
Tax revenue	1,735	1,217	1,298	1,751	3,130	3,005	4,154	5,090	5,553	6,035	6,589
Income taxes	428	268	302	534	912	895	1,010	1,096	1,191	1,290	1,397
VAT	444	234	308	463	912	796	1,456	1,607	1,763	1,917	2,088
Excise taxes	399	322	307	343	557	526	671	799	874	947	1,043
Other taxes on goods and services	132	31	31	70	291	297	343	372	403	437	473
Taxes on international trade	332	362	350	341	458	492	674	780	849	933	1,035
Property taxes	0	0	0	0	0	0	0	436	472	512	554
Nontax revenue	156	151	159	228	278	263	295	320	347	406	439
Grants	8	5	7	33	7	12	13	15	16	17	19
Total expenditure and net lending	3,095	3,284	3,522	4,473	5,819	5,681	6,594	7,247	7,815	8,365	8,974
Current expenditure	2,301	2,672	2,748	3,520	4,609	4,608	5,142	5,647	6,066	6,445	6,867
Wages and salaries	686	794	846	956	1,012	1,012	1,207	1,308	1,417	1,535	1,662
Goods and services	162	180	169	183	300	300	335	363	394	426	462
Subsidies and transfers	552	717	685	815	1,104	1,104	1,199	1,319	1,451	1,596	1,755
of which: social safety net transfers	…	…	…	142	…	187	201	218	236	256	277
Interest payments 1/	901	980	1,048	1,565	2,193	2,192	2,400	2,657	2,804	2,888	2,989
Capital expenditure and net lending	794	612	774	953	1,210	1,073	1,453	1,599	1,749	1,920	2,107
Capital expenditure	799	615	768	715	1,210	1,073	1,453	1,599	1,749	1,920	2,107
Net lending	-5	-4	7	237	0	0	0	0	0	0	0
Overall balance	-1,196	-1,910	-2,058	-2,460	-2,404	-2,401	-2,132	-1,822	-1,899	-1,907	-1,927
Memorandum items:
Central government primary balance	-295	-930	-1,010	-895	-211	-209	268	835	905	981	1,062
Central government debt 1/	13,142	15,158	18,082	27,872	…	29,856	34,084	37,512	40,216	41,608	44,601
Nominal GOP (in billion of rupees)	15,911	15,840	17,686	23,688	30,320	29,852	33,533	36,326	39,362	42,634	46,154

Sources: Data provided by the Sri Lankan authorities; and IMF staff estimates.

^1/Based on illustrative restructuring terms

^{Table 2b.}

Sri Lanka: Summary of Central Government Operations, 2019–28 (Restructuring Scenario)

(In percent of GDP)

Sources: Data provided by the Sri Lankan authorities; and IMF staff estimates.

^1/Based on illustrative restructuring terms

^{Table 2b.}

Sri Lanka: Summary of Central Government Operations, 2019–28 (Restructuring Scenario)

(In percent of GDP)

	2019	2020	2021	2022	2023		2024	2025	2026	2027	2028
	Act			Prel.	Budget	Proj.	Proj.
Total revenue and grants	11.9	8.7	8.3	8.5	11.3	11.0	13.3	14.9	15.0	15.1	15.3
Total revenue	11.9	8.6	8.2	8.4	11.2	10.9	13.3	14.9	15.0	15.1	15.2
Tax revenue	10.9	7.7	7.3	7.4	10.3	10.1	12.4	14.0	14.1	14.2	14.3
Income taxes	2.7	1.7	1.7	2.3	3.0	3.0	3.0	3.0	3.0	3.0	3.0
VAT	2.8	1.5	1.7	2.0	3.0	2.7	4.3	4.4	4.5	4.5	4.5
Excise taxes	2.5	2.0	1.7	1.4	1.8	1.8	2.0	2.2	2.2	2.2	2.3
Other taxes on goods and services	0.8	0.2	0.2	0.3	1.0	1.0	1.0	1.0	1.0	1.0	1.0
Taxes on international trade	2.1	2.3	2.0	1.4	1.5	1.6	2.0	2.1	2.2	2.2	2.2
Property taxes	0.0	0.0	0.0	0.0	0.0	0.0	0.0	1.2	1.2	1.2	1.2
Nontax revenue	1.0	1.0	0.9	1.0	0.9	0.9	0.9	0.9	0.9	1.0	1.0
Grants	0.0	0.0	0.0	0.1	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Total expenditure and net lending	19.5	20.7	19.9	18.9	19.2	19.0	19.7	19.9	19.9	19.6	19.4
Current expenditure	14.5	16.9	15.5	14.9	15.2	15.4	15.3	15.5	15.4	15.1	14.9
Wages and salaries	4.3	5.0	4.8	4.0	3.3	3.4	3.6	3.6	3.6	3.6	3.6
Goods and services	1.0	1.1	1.0	0.8	1.0	1.0	1.0	1.0	1.0	1.0	1.0
Subsidies and transfers	3.5	4.5	3.9	3.4	3.6	3.7	3.6	3.6	3.7	3.7	3.8
of which: social safety net transfers	…	…	…	0.6	…	0.6	0.6	0.6	0.6	0.6	0.6
Interest payments 1/	5.7	6.2	5.9	6.6	7.2	7.3	7.2	7.3	7.1	6.8	6.5
Capital expenditure and net lending	5.0	3.9	4.4	4.0	4.0	3.6	4.3	4.4	4.4	4.5	4.6
Capital expenditure	5.0	3.9	4.3	3.0	4.0	3.6	4.3	4.4	4.4	4.5	4.6
Net lending	0.0	0.0	0.0	1.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Overall balance	-7.5	-12.1	-11.6	-10.4	-7.9	-8.0	-6.4	-5.0	-4.8	-4.5	-4.2
Memorandum items:
Central government primary balance	-1.9	-5.9	-5.7	-3.8	-0.7	-0.7	0.8	2.3	2.3	2.3	2.3
Central government debt 1/	82.6	95.7	102.2	117.7	…	100.0	101.6	103.3	102.2	97.6	96.6
Nominal GOP (in billion of rupees)	15,911	15,840	17,686	23,688	30,320	29,852	33,533	36,326	39,362	42,634	46,154

Sources: Data provided by the Sri Lankan authorities; and IMF staff estimates.

^1/Based on illustrative restructuring terms

View Table

^{Table 2b.}

Sri Lanka: Summary of Central Government Operations, 2019–28 (Restructuring Scenario)

(In percent of GDP)

	2019	2020	2021	2022	2023		2024	2025	2026	2027	2028
	Act			Prel.	Budget	Proj.	Proj.
Total revenue and grants	11.9	8.7	8.3	8.5	11.3	11.0	13.3	14.9	15.0	15.1	15.3
Total revenue	11.9	8.6	8.2	8.4	11.2	10.9	13.3	14.9	15.0	15.1	15.2
Tax revenue	10.9	7.7	7.3	7.4	10.3	10.1	12.4	14.0	14.1	14.2	14.3
Income taxes	2.7	1.7	1.7	2.3	3.0	3.0	3.0	3.0	3.0	3.0	3.0
VAT	2.8	1.5	1.7	2.0	3.0	2.7	4.3	4.4	4.5	4.5	4.5
Excise taxes	2.5	2.0	1.7	1.4	1.8	1.8	2.0	2.2	2.2	2.2	2.3
Other taxes on goods and services	0.8	0.2	0.2	0.3	1.0	1.0	1.0	1.0	1.0	1.0	1.0
Taxes on international trade	2.1	2.3	2.0	1.4	1.5	1.6	2.0	2.1	2.2	2.2	2.2
Property taxes	0.0	0.0	0.0	0.0	0.0	0.0	0.0	1.2	1.2	1.2	1.2
Nontax revenue	1.0	1.0	0.9	1.0	0.9	0.9	0.9	0.9	0.9	1.0	1.0
Grants	0.0	0.0	0.0	0.1	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Total expenditure and net lending	19.5	20.7	19.9	18.9	19.2	19.0	19.7	19.9	19.9	19.6	19.4
Current expenditure	14.5	16.9	15.5	14.9	15.2	15.4	15.3	15.5	15.4	15.1	14.9
Wages and salaries	4.3	5.0	4.8	4.0	3.3	3.4	3.6	3.6	3.6	3.6	3.6
Goods and services	1.0	1.1	1.0	0.8	1.0	1.0	1.0	1.0	1.0	1.0	1.0
Subsidies and transfers	3.5	4.5	3.9	3.4	3.6	3.7	3.6	3.6	3.7	3.7	3.8
of which: social safety net transfers	…	…	…	0.6	…	0.6	0.6	0.6	0.6	0.6	0.6
Interest payments 1/	5.7	6.2	5.9	6.6	7.2	7.3	7.2	7.3	7.1	6.8	6.5
Capital expenditure and net lending	5.0	3.9	4.4	4.0	4.0	3.6	4.3	4.4	4.4	4.5	4.6
Capital expenditure	5.0	3.9	4.3	3.0	4.0	3.6	4.3	4.4	4.4	4.5	4.6
Net lending	0.0	0.0	0.0	1.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Overall balance	-7.5	-12.1	-11.6	-10.4	-7.9	-8.0	-6.4	-5.0	-4.8	-4.5	-4.2
Memorandum items:
Central government primary balance	-1.9	-5.9	-5.7	-3.8	-0.7	-0.7	0.8	2.3	2.3	2.3	2.3
Central government debt 1/	82.6	95.7	102.2	117.7	…	100.0	101.6	103.3	102.2	97.6	96.6
Nominal GOP (in billion of rupees)	15,911	15,840	17,686	23,688	30,320	29,852	33,533	36,326	39,362	42,634	46,154

Sources: Data provided by the Sri Lankan authorities; and IMF staff estimates.

^1/Based on illustrative restructuring terms

^{Table 3.}

Sri Lanka: Monetary Accounts, 2019–28 1/ (Restructuring Scenario)

(In billions of rupees, unless otherwise indicated, end of period)

Sources: Central Sank of Sri Lanka; and IMF staff estimates. 1/ Covers the monetary authorities and commercial banks. 2/ Arise from purchases of government securities, for monetary policy purposes, on temporary basis with an agreement to reverse the transaction after an agreed number of days.

^{Table 3.}

Sri Lanka: Monetary Accounts, 2019–28 1/ (Restructuring Scenario)

(In billions of rupees, unless otherwise indicated, end of period)

Sources: Central Sank of Sri Lanka; and IMF staff estimates. 1/ Covers the monetary authorities and commercial banks. 2/ Arise from purchases of government securities, for monetary policy purposes, on temporary basis with an agreement to reverse the transaction after an agreed number of days.

View Table

^{Table 3.}

Sri Lanka: Monetary Accounts, 2019–28 1/ (Restructuring Scenario)

(In billions of rupees, unless otherwise indicated, end of period)

Sources: Central Sank of Sri Lanka; and IMF staff estimates. 1/ Covers the monetary authorities and commercial banks. 2/ Arise from purchases of government securities, for monetary policy purposes, on temporary basis with an agreement to reverse the transaction after an agreed number of days.

^{Table 4.}

Sri Lanka: Balance of Payments, 2019–28 (Restructuring Scenario)

(In millions of U.S. dollars, unless otherwise indicated)

Sources: Data provided by the CBSL; and IMF staff estimates. 1/ Excluding changes in reserves assets and credit and loans with the IMF. 2/ Excluding credits and loans with the IMF, other than reserves (net purchases and repurchases), and other international institutions’ loan disbursement. 3/ Excluding PBOC swap ($1.4bn in 2022) which becomes usable once GIR rise above 3 months of previous year’s import cover. 4/ In this table, all program financing in 2022-2027 (IFI budget support, debt relief, external arrears) except the IMF financing is included above the line.

^{Table 4.}

Sri Lanka: Balance of Payments, 2019–28 (Restructuring Scenario)

(In millions of U.S. dollars, unless otherwise indicated)

Sources: Data provided by the CBSL; and IMF staff estimates. 1/ Excluding changes in reserves assets and credit and loans with the IMF. 2/ Excluding credits and loans with the IMF, other than reserves (net purchases and repurchases), and other international institutions’ loan disbursement. 3/ Excluding PBOC swap ($1.4bn in 2022) which becomes usable once GIR rise above 3 months of previous year’s import cover. 4/ In this table, all program financing in 2022-2027 (IFI budget support, debt relief, external arrears) except the IMF financing is included above the line.

View Table

^{Table 4.}

Sri Lanka: Balance of Payments, 2019–28 (Restructuring Scenario)

(In millions of U.S. dollars, unless otherwise indicated)

Sources: Data provided by the CBSL; and IMF staff estimates. 1/ Excluding changes in reserves assets and credit and loans with the IMF. 2/ Excluding credits and loans with the IMF, other than reserves (net purchases and repurchases), and other international institutions’ loan disbursement. 3/ Excluding PBOC swap ($1.4bn in 2022) which becomes usable once GIR rise above 3 months of previous year’s import cover. 4/ In this table, all program financing in 2022-2027 (IFI budget support, debt relief, external arrears) except the IMF financing is included above the line.

^{Table 5.}

Sri Lanka: Composition of Public Debt (Including Arrears)

Source: Sri Lankan authorities; and IMF staff calculations.

^1/includes all loans from China EXIM and Sinosure-backed loans from private lenders, including China Development Bank

^2/Excludes Sinosure-backed loan

^3/Government guaranteed FX loans of the Ceylon Petroleum Corporation were transferred to the Central Government balance sheet, effective December 31, 2022.

^{Table 5.}

Sri Lanka: Composition of Public Debt (Including Arrears)

	2021			2022 (prel. estimate)
	billion LKR	million USS	percent of GDP	billion LKR	million USS	percent of GDP
Total public debt	20,219.7	100,880	114.3	30,355	83,595	128.1
Foreign-law debt	8,129	40,556	46.0	15,060	41,474	63.6
Multilateral (incl. IMF)	2,244	11,196	12.7	4,174	11,495	17.6
Official bilateral	2,249	11,219	12.7	4,147	11,419	17.5
Paris Club creditors	1,094	5,458	6,2	1,737	4,784	7.3
Japan	649	3,236	3.7	1,027	2,828	4.3
France	82	410	0.5	152	418	0.6
Korea	67	332	0,4	115	317	0.5
Other	297	1,481	1.7	443	1,221	1.9
Non-Paris Club creditors	1,155	5,761	6,5	2,409	6,635	10.2
China1	916	4,572	5,2	1,628	4,483	6.9
India	173	864	1.0	666	1,833	2.8
Saudi Arabia	26	130	0.1	51	139	0.2
Other	39	195	0,2	65	180	0.3
Private	3,280	16,367	18.5	6,000	16,524	25.3
Bonds	2,651	13,225	15,0	4,853	13,364	20.5
China Dev. Bank2	578	2,883	3,3	1,053	2,901	4.4
Riggs National Bank	2	8	0.0	3	8	0.0
SOE trade payables (non-guaranteed)	50	251	0,3	91	251	0.4
Central bank swap lines	356	1,774	2.0	739	2,036	3.1
Local-law debt	12,091	60,324	68.4	15,295	42,121	64.6
Local currency	10,904	54,400	61.7	13,817	38,052	58.3
Tbills	2,271	11,329	12.8	4,126	11,364	17.4
of which: held by CBSL	1,391	6,940	7.9	2,598	7,155	11.0
Tbonds	6,968	34,764	39,4	8,722	24,020	36.8
Bank loans	761	3,796	4.3	709	1,952	3.0
of which: guaranteed SOE loans	623	3,108	3,5	629	1,731	2.7
CBSL advances	150	749	0,8	236	649	1.0
Bank overdrafts	754	3,761	4.3	24	67	0.1
Foreign currency	1,187	5,924	6.7	1,478	4,069	6.2
Sri Lanka Development Bonds	460	2,295	2.6	401	1,103	1.7
Bank loans3	727	3,629	4,1	1,077	2,966	4.5
of which: guaranteed SOE loans and payables	578	2,886	3,3	131	361	0.6
Memorandum item:
Central government debt	18,082	90,216	102.2	27,872	76,758	117.7

Source: Sri Lankan authorities; and IMF staff calculations.

^1/includes all loans from China EXIM and Sinosure-backed loans from private lenders, including China Development Bank

^2/Excludes Sinosure-backed loan

^3/Government guaranteed FX loans of the Ceylon Petroleum Corporation were transferred to the Central Government balance sheet, effective December 31, 2022.

View Table

^{Table 5.}

Sri Lanka: Composition of Public Debt (Including Arrears)

	2021			2022 (prel. estimate)
	billion LKR	million USS	percent of GDP	billion LKR	million USS	percent of GDP
Total public debt	20,219.7	100,880	114.3	30,355	83,595	128.1
Foreign-law debt	8,129	40,556	46.0	15,060	41,474	63.6
Multilateral (incl. IMF)	2,244	11,196	12.7	4,174	11,495	17.6
Official bilateral	2,249	11,219	12.7	4,147	11,419	17.5
Paris Club creditors	1,094	5,458	6,2	1,737	4,784	7.3
Japan	649	3,236	3.7	1,027	2,828	4.3
France	82	410	0.5	152	418	0.6
Korea	67	332	0,4	115	317	0.5
Other	297	1,481	1.7	443	1,221	1.9
Non-Paris Club creditors	1,155	5,761	6,5	2,409	6,635	10.2
China1	916	4,572	5,2	1,628	4,483	6.9
India	173	864	1.0	666	1,833	2.8
Saudi Arabia	26	130	0.1	51	139	0.2
Other	39	195	0,2	65	180	0.3
Private	3,280	16,367	18.5	6,000	16,524	25.3
Bonds	2,651	13,225	15,0	4,853	13,364	20.5
China Dev. Bank2	578	2,883	3,3	1,053	2,901	4.4
Riggs National Bank	2	8	0.0	3	8	0.0
SOE trade payables (non-guaranteed)	50	251	0,3	91	251	0.4
Central bank swap lines	356	1,774	2.0	739	2,036	3.1
Local-law debt	12,091	60,324	68.4	15,295	42,121	64.6
Local currency	10,904	54,400	61.7	13,817	38,052	58.3
Tbills	2,271	11,329	12.8	4,126	11,364	17.4
of which: held by CBSL	1,391	6,940	7.9	2,598	7,155	11.0
Tbonds	6,968	34,764	39,4	8,722	24,020	36.8
Bank loans	761	3,796	4.3	709	1,952	3.0
of which: guaranteed SOE loans	623	3,108	3,5	629	1,731	2.7
CBSL advances	150	749	0,8	236	649	1.0
Bank overdrafts	754	3,761	4.3	24	67	0.1
Foreign currency	1,187	5,924	6.7	1,478	4,069	6.2
Sri Lanka Development Bonds	460	2,295	2.6	401	1,103	1.7
Bank loans3	727	3,629	4,1	1,077	2,966	4.5
of which: guaranteed SOE loans and payables	578	2,886	3,3	131	361	0.6
Memorandum item:
Central government debt	18,082	90,216	102.2	27,872	76,758	117.7

Source: Sri Lankan authorities; and IMF staff calculations.

^1/includes all loans from China EXIM and Sinosure-backed loans from private lenders, including China Development Bank

^2/Excludes Sinosure-backed loan

^3/Government guaranteed FX loans of the Ceylon Petroleum Corporation were transferred to the Central Government balance sheet, effective December 31, 2022.

^{Table 6.}

Sri Lanka: Gross External Financing, 2019–2028 (Restructuring Scenario)

(In millions of U.S. dollars, unless otherwise indicated)

Sources: Central Bank of Sri Lan ka; and IMF staff estimates and projections.

^{Table 6.}

Sri Lanka: Gross External Financing, 2019–2028 (Restructuring Scenario)

(In millions of U.S. dollars, unless otherwise indicated)

Sources: Central Bank of Sri Lan ka; and IMF staff estimates and projections.

View Table

^{Table 6.}

Sri Lanka: Gross External Financing, 2019–2028 (Restructuring Scenario)

(In millions of U.S. dollars, unless otherwise indicated)

Sources: Central Bank of Sri Lan ka; and IMF staff estimates and projections.

^{Table 7.}

Sri Lanka: Projected Payments to the Fund, 2023–2036 ^1/

(In millions of SDRs, unless otherwise indicated)

Source: IMF staff estimates.

^1/Projections as of February 23, 2023.

^2/As of th e end of the year.

^{Table 7.}

Sri Lanka: Projected Payments to the Fund, 2023–2036 ^1/

(In millions of SDRs, unless otherwise indicated)

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035	2036
Fund repurchases and charges
In millions of SDR	196.6	255.9	278.4	291.0	305.8	330.1	379.0	416.5	478.6	472.1	429.9	330.3	234.5	142.5
In millions of U.S. dollars	256.4	335.0	363.6	379.1	396.4	428.0	491.3	540.0	620.4	612.0	557.3	428.2	304.1	184.8
In percent of exports of goods and services	1.3	1.6	1.7	1.6	1.6	1.7	1.9	2.0	2.2	2.0	1.8	1.3	0.9	0.5
In percent of government fiscal revenue	3.1	3.3	3.1	3.1	3.1	3.1	3.4	3.5	3.7	3.5	2.9	2.1	1.4	0.8
In percent of quota	34.0	44.2	48.1	50.3	52.8	57.0	65.5	72.0	82.7	81.6	74.3	57.1	40.5	24.6
In percent of gross official reserves	5.8	5.5	4.3	3.5	2.8	2.7	3.0	3.2	3.6	3.4	3.0	2.3	1.6	0.9
Fund credit outstanding 2/
In millions of SOR	1,176.8	1,526.1	1,875.4	2,234.7	2,348.8	2,188.6	1,968.5	1,693.3	1,333.5	952.5	592.7	317.5	127.0	21.2
In millions of U.S. dollars	1,537	2,000	2,437	2,933	2,924	2,725	2,450.6	2,108.1	1,660.1	1,185.8	737.8	395.3	158.1	26.4
In percent of exports of goods and services	8.0	9.6	11.1	12.7	12.2	10.8	9.3	7.7	5.8	4.0	2.4	1.2	0.5	0.1
In percent of government fiscal revenue	18.6	19.8	20.9	24.1	22.8	19.9	16.8	13.5	10.0	6.7	3.9	2.0	0.7	0.1
In percent of quota	203.3	263.7	324.0	386.1	405.8	378.1	340.1	292.6	230.4	164.6	102.4	54.9	21.9	3.7
In percent of GDP	2.0	2.6	3.1	3.6	3.4	3.0	2.6	2.1	1.6	1.1	0.6	0.3	0.1	0.0
In percent of gross official reserves	34.7	32.6	28.6	26.9	20.6	17.2	15.0	12.5	9.6	6.6	4.0	2.1	0.8	0.1
Memorandum items:
Exports of goods and services (in millions of U.S. dollars)	19,177	20,815	21,944	23,041	24,051	25,114	26,245	27,426	28,660	29,949	31,297	32,705	34,177	35,715
Central government fiscal revenue (billion of Rupees)	3,268	4,449	5,410	5,900	6,441	7,028	7,669	8,369	9,132	9,965	10,874	11,866	12,949	14,130
Quota 2/	578.8	578.8	578.8	578.8	578.8	578.8	578.8	578.8	578.8	578.8	578.8	578.8	578.8	578.8
Quota {in millions of U.S. dollars) 2/	756	759	752	760	721	721	721	721	721	721	721	721	721	721
Gross official reserves (in mill ions of U.S. dollars) 2/	4,431	6,128	8,520	10,888	14,208	15,875	16,375	16,875	17,375	17,875	18,375	18,875	19,375	19,875

Source: IMF staff estimates.

^1/Projections as of February 23, 2023.

^2/As of th e end of the year.

View Table

^{Table 7.}

Sri Lanka: Projected Payments to the Fund, 2023–2036 ^1/

(In millions of SDRs, unless otherwise indicated)

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035	2036
Fund repurchases and charges
In millions of SDR	196.6	255.9	278.4	291.0	305.8	330.1	379.0	416.5	478.6	472.1	429.9	330.3	234.5	142.5
In millions of U.S. dollars	256.4	335.0	363.6	379.1	396.4	428.0	491.3	540.0	620.4	612.0	557.3	428.2	304.1	184.8
In percent of exports of goods and services	1.3	1.6	1.7	1.6	1.6	1.7	1.9	2.0	2.2	2.0	1.8	1.3	0.9	0.5
In percent of government fiscal revenue	3.1	3.3	3.1	3.1	3.1	3.1	3.4	3.5	3.7	3.5	2.9	2.1	1.4	0.8
In percent of quota	34.0	44.2	48.1	50.3	52.8	57.0	65.5	72.0	82.7	81.6	74.3	57.1	40.5	24.6
In percent of gross official reserves	5.8	5.5	4.3	3.5	2.8	2.7	3.0	3.2	3.6	3.4	3.0	2.3	1.6	0.9
Fund credit outstanding 2/
In millions of SOR	1,176.8	1,526.1	1,875.4	2,234.7	2,348.8	2,188.6	1,968.5	1,693.3	1,333.5	952.5	592.7	317.5	127.0	21.2
In millions of U.S. dollars	1,537	2,000	2,437	2,933	2,924	2,725	2,450.6	2,108.1	1,660.1	1,185.8	737.8	395.3	158.1	26.4
In percent of exports of goods and services	8.0	9.6	11.1	12.7	12.2	10.8	9.3	7.7	5.8	4.0	2.4	1.2	0.5	0.1
In percent of government fiscal revenue	18.6	19.8	20.9	24.1	22.8	19.9	16.8	13.5	10.0	6.7	3.9	2.0	0.7	0.1
In percent of quota	203.3	263.7	324.0	386.1	405.8	378.1	340.1	292.6	230.4	164.6	102.4	54.9	21.9	3.7
In percent of GDP	2.0	2.6	3.1	3.6	3.4	3.0	2.6	2.1	1.6	1.1	0.6	0.3	0.1	0.0
In percent of gross official reserves	34.7	32.6	28.6	26.9	20.6	17.2	15.0	12.5	9.6	6.6	4.0	2.1	0.8	0.1
Memorandum items:
Exports of goods and services (in millions of U.S. dollars)	19,177	20,815	21,944	23,041	24,051	25,114	26,245	27,426	28,660	29,949	31,297	32,705	34,177	35,715
Central government fiscal revenue (billion of Rupees)	3,268	4,449	5,410	5,900	6,441	7,028	7,669	8,369	9,132	9,965	10,874	11,866	12,949	14,130
Quota 2/	578.8	578.8	578.8	578.8	578.8	578.8	578.8	578.8	578.8	578.8	578.8	578.8	578.8	578.8
Quota {in millions of U.S. dollars) 2/	756	759	752	760	721	721	721	721	721	721	721	721	721	721
Gross official reserves (in mill ions of U.S. dollars) 2/	4,431	6,128	8,520	10,888	14,208	15,875	16,375	16,875	17,375	17,875	18,375	18,875	19,375	19,875

Source: IMF staff estimates.

^1/Projections as of February 23, 2023.

^2/As of th e end of the year.