Abstract
SRI LANKA
Title page
SRI LANKA
REQUEST FOR AN EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY—SUPPLEMENTARY INFORMATION AND REVISED PROPOSED DECISIONS
March 14, 2023
Prepared By
Asia and Pacific Department
This supplement provides an update on recent developments since the issuance of the report on March 7, 2023. The update does not alter the thrust of the staff appraisal.
Lending into Official Arrears. As noted in the staff report, Iran, Kuwait, Pakistan, and Saudi Arabia required more time to consent to the IMF financing notwithstanding Sri Lanka’s arrears owed to them. Since then, consent has been received from Pakistan, Saudi Arabia, and Kuwait on March 8, March 9, and March 12, 2023, respectively. Having not received such consent from Iran, staff has examined the application of the three criteria under the Lending into Official Arrears policy with respect to the provision of Fund financing for Sri Lanka in view of their claims. Based on staff’s assessment (see Annex I attached to this supplement) all three criteria are satisfied.
President’s open letter to bilateral creditors. The President of Sri Lanka issued an open letter to the country’s official bilateral creditors on March 14, 2023.1 In the letter, he encouraged bilateral creditors to coordinate—in any form they deem appropriate— and makes three specific commitments: (i) to communicate transparently on financial liabilities and agreed debt treatments; (ii) not to resume debt service without a treatment consistent with IMF program parameters and comparability of treatment (CoT); and (iii) to ensure comparable treatment of all external creditors.
Signed MoU on financial obligations to the IMF. On March 10, the Central Bank of Sri Lanka and the Ministry of Finance signed a memorandum of understanding that clarifies the responsibilities for timely servicing of their financial obligations to the IMF.
Abolishment of banks’ surrender requirements.
The CBSL has recently abolished the requirements that banks surrender, to the CBSL, a certain portion of converted foreign exchange inflows from exports and inward worker remittances, thus eliminating a related Multiple Currency Practice (MCP) and two Capital Flow Measures (CFMs). Effective March 7, 2023, the requirement for banks to sell to the CBSL a fraction of their purchases of FX from export proceeds and inward workers’ remittances has been repealed. As a result, the MCP arising from the use of a weekly volume weighted average rate for the mandatory surrender of FX by banks of these proceeds to the CBSL has been eliminated. In addition, it also implies that the two outflow CFMs—a surrender requirement for banks on purchases of export proceeds and a surrender requirement for banks on purchases of inward worker remittances—have been eliminated as well.
Staff continues to support the approval of all remaining MCPs, for a period of twelve months or until the next Article IV consultation, whichever is sooner, as the measures giving rise to them are maintained for BOP reasons, are temporary, and do not give Sri Lanka an unfair competitive advantage over other members or discriminate among members.
Annex I. Lending into Arrears to Official Bilateral Creditors—Staff’s Assessment of Three Criteria
Staff assesses that the conditions are met for the Fund to provide financing to Sri Lanka in line with the policy on arrears to official bilateral creditors, notwithstanding its outstanding arrears to Iran. In particular:
1. Prompt financial support from the Fund is considered essential and the member is pursuing appropriate policies. Sri Lanka continues to face significant macroeconomic challenges. The Fund’s prompt financial support is considered essential to address Sri Lanka’s balance of payments problems and restore its debt sustainability. The authorities are pursuing appropriate policies under the EFF-supported arrangement, notably by implementing an ambitious revenue-based fiscal consolidation supported by a comprehensive debt restructuring, pursuing a multi-pronged strategy to restore price stability and rebuild external buffers, safeguarding financial stability and social safety net, reducing corruption vulnerabilities, and enhancing growth prospects.
2. The debtor is making ’good faith’ efforts to reach agreement with the creditor on a contribution consistent with the parameters of the Fund-supported program:
In terms of process, Sri Lanka has engaged in good faith with its bilateral official creditors. Iran received bilateral letters from the authorities on process updates on two occasions. The Alternative Executive Director representing Sri Lanka at the IMF also reached out bilaterally to his Iranian counterpart to provide him with the latest debt data and information.
In terms of requested relief, the authorities are committed to continue their good faith efforts until all the remaining arrears are resolved on terms consistent with restoring debt sustainability and program parameters, and to offer all creditors comparable terms to avoid disproportionate contributions from any of their bilateral creditors.
3. The decision to provide financing despite these arrears is not expected to have an undue negative effect on the Fund’s ability to mobilize official financing packages in future cases. Creditors representing a large majority of official bilateral claims (95 percent) subject to a debt treatment have indicated their commitment to debt restructuring and provided specific and credible financing assurances, including China, Hungary, India and the Paris Club. Saudi Arabia has also “expressed its support for the process and acknowledged the importance to offer financing assurances in the near future.”1 Debt service to Iran (0.7 percent) is small relative to total official bilateral debt service subject to restructuring, so that the contribution to financing the program from Iran would be small relative to the contribution of other official bilateral creditors. Historically, Iran has a very limited track record of providing relief in the context of Fund-supported programs (including no provision of HIPC relief to its 3 completion-point debtors). Overall, in staff’s view, providing financing to Sri Lanka despite its arrears is not expected to have an undue negative effect on the Fund’s ability to mobilize future financing packages, given strong support from the international community in the context of the Fund-supported program, including credible and specific assurances from creditors accounting for a large majority of bilateral claims, and the Sri Lankan authorities efforts to resolve the arrears in a timely manner.
The letter is available on the website of Ministry of Finance, Economic Stabilization and National Policies.
As recorded in the statement following the Paris Club meeting to provide financing assurances, held in the presence of representatives of Saudi Arabia and the Kuwait Fund for Arab Economic Development.