This to be the Beginning of a New Economic Era – Sri Lanka President

Ranil Wickremesinghe - President of Sri Lanka

Sri Lankan President Ranil Wickremesinghe. (AP Photo / Eranga Jayawardena)

Sri Lankan President Ranil Wickremesinghe said that this is an important step in the history of Sri Lanka. “Not only rising from the bankruptcy crisis and the debt moratorium, it is also key to ensure that our social sectors are protected and both our economic and social aspect of our lifestyle will certainly not have any further setbacks.”

The President made this statement having reached a staff-level agreement between Sri Lanka and the IMF.

Accordingly, President Wickremesinghe noted that he considers this  to be the beginning of a new economic era where the country is committed to a very competitive export oriented industry while maintaining and improving social standards as well as looking after the vulnerable groups.

“The beginning will be difficult, but we know as we go on that we can make more progress. Our commitment is what  matters now and we should not only fulfil the targets here, but we must get ahead of them,” the President said, adding, “I appeal to the country, let us reorient ourselves to an export oriented economy which will also make it easier for us to sustain our social services.”

He also said that it also should be a beginning for the fact that Sri Lanka should reduce its debts and if possible, even eliminate its debts.

On a personal note, the President said, “I would like to say that when I was born, Sri Lanka had no debt and we had sufficient reserves to lend to the UK which was recovering from war times. We had made enough out of our rubber, and our tea and we built our first reservoir out of our own initiative. Now that was the government of Mr. D.S. Senanayake. And he believed in one principle that a nation and a person should be debt free. He was the Chairman of the Lay Organisation of the Buddhist sects in this country and like all others, was committed to follow the doctrine that people should not get into debt and there should not be insolvency.”

Therefore, the President noted that if the country is to uphold Article 09 of the Constitution, it must follow that path. “You can’t pay lip-service only. And let this be the beginning and the way forward because on the 75th anniversary of our independence this is the best commitment we can make for the next 25 years.”

An International Monetary Fund (IMF) mission led by Mr. Peter Breuer and Mr. Masahiro Nozaki visited Colombo from August 24 to September 1, 2022 to continue discussions on IMF support for Sri Lanka and the authorities’ comprehensive economic reform program.100

At the end of the mission, issuing a  statement the IMF team said the Sri Lankan authorities and the IMF team have reached staff-level agreement to support the authorities’ economic adjustment and reform policies with a new 48-month Extended Fund Facility (EFF) with a requested access of about SDR 2.2 billion (equivalent to US$2.9 billion).

The IMF team issuing a press release today (01) said that Sri Lanka has been facing an acute crisis. “Vulnerabilities have grown owing to inadequate external buffers and an unsustainable public debt dynamic. The April debt moratorium led to Sri Lanka defaulting on its external obligations, and a critically low level of foreign reserves has hampered the import of essential goods, including fuel, further impeding economic activity.

The economy is expected to contract by 8.7 percent in 2022 and inflation recently exceeded 60 percent. The impact has been disproportionately borne by the poor and vulnerable.”

The agreement is subject to the approval by IMF management and the Executive Board in the period ahead, contingent on the implementation by the authorities of prior actions, and on receiving financing assurances from Sri Lanka’s official creditors and making a good faith effort to reach a collaborative agreement with private creditors. Debt relief from Sri Lanka’s creditors and additional financing from multilateral partners will be required to help ensure debt sustainability and close financing gaps.

The IMF team noted that against this backdrop, the authorities’ program, supported by the Fund, would aim to stabilise the economy, protect the livelihoods of the Sri Lankan people, and prepare the ground for economic recovery and promoting sustainable and inclusive growth.

The IMF team held meetings with President and Finance Minister Ranil Wickremesinghe, Prime Minister Dinesh Gunawardena, Central Bank Governor Dr. P. Nandalal Weerasinghe, Secretary to the Treasury K M Mahinda Siriwardana, and other senior government and CBSL officials. It also met with Parliamentarians, representatives from the private sector, civil society organisations and development partners.

Key elements of the program are:

  • Raising fiscal revenue to support fiscal consolidation. Starting from one of the lowest revenue levels in the world, the program will implement major tax reforms. These reforms include making personal income tax more progressive and broadening the tax base for corporate income tax and VAT. The program aims to reach a primary surplus of 2.3 percent of GDP by 2024.
  • Introducing cost-recovery based pricing for fuel and electricity to minimise fiscal risks arising from state-owned enterprises. The team welcomed the authorities’ already announced substantial revenue measures and energy pricing reforms;
  • Mitigating the impact of the current crisis on the poor and vulnerable by raising social spending, and improving the coverage and targeting of social safety net programs;
  • Restoring price stability through data-driven monetary policy action, fiscal consolidation, phasing out monetary financing, and stronger central bank autonomy that allow pursuing a flexible inflation targeting regime. A new Central Bank Act is a cornerstone of this strategy;
  • Rebuilding foreign reserves through restoring a market-determined and flexible exchange rate, supported by the comprehensive policy package under the program;
  • Safeguarding financial stability by ensuring a healthy and adequately capitalised banking system, and by upgrading financial sector safety nets and regulatory standards with a revised Banking Act; and reducing corruption vulnerabilities through improving fiscal transparency and public financial management, introducing a stronger anti-corruption legal framework, and conducting an in-depth governance diagnostic, supported by IMF technical assistance.