ECONOMYNEXT – The International Monetary Fund said it has approved a 48 month program for Sri Lanka worth 3 billion US dollars (2.286 billion special drawing rights) or 395 percent of the Indian Ocean island’s quota.
Sri Lanka’s currency collapsed from 200 to 360 to the US dollar, as the central bank printed unprecedented volumes of money to target what was claimed to be a ‘persistent output gap’, crippling Treasuries auctions and botched an attempted float with a surrender rule.
“The economy is facing significant challenges stemming from pre-existing vulnerabilities and policy missteps in the lead up to the crisis, further aggravated by a series of external shocks,” an IMF statement said.
“The EFF-supported program aims to restore Sri Lanka’s macroeconomic stability and debt sustainability, mitigate the economic impact on the poor and vulnerable, safeguard financial sector stability, and strengthen governance and growth potential.”
Very pleased our Executive Board today approved about $3 bn of IMF support for Sri Lanka’s economic policies & reforms. Important milestone w/ int’l creditors coming together to help to restore debt sustainability. Crucial to unlock 🇱🇰 growth potential. https://t.co/8zKJqlMQ7s
— Kristalina Georgieva (@KGeorgieva) March 20, 2023
Amid deflationary policy, the rupee has started to appreciate over the past two weeks.
Sri Lanka’s central bank is able to operate inflationary policy for more than a year running down reserves through an external anchor while triggering unsustainable credit, before consumer prices hit its 5 percent target, a domestic anchor.
The external and domestic anchor conflicts are to be legalized, along with leeway to target an output gap target (monetary stimulus) in a law to be passed under the IMF deal.
The full statement is reproduced below:
FOR IMMEDIATE RELEASE
Washington, DC: The Executive Board of the International Monetary Fund (IMF) approved today a 48‑month extended arrangement under the Extended Fund Facility (EFF) with an amount of SDR 2.286 billion (395 percent of quota or about US$3 billion).
Sri Lanka has been hit hard by a catastrophic economic and humanitarian crisis. The economy is facing significant challenges stemming from pre-existing vulnerabilities and policy missteps in the lead up to the crisis, further aggravated by a series of external shocks.
The EFF-supported program aims to restore Sri Lanka’s macroeconomic stability and debt sustainability, mitigate the economic impact on the poor and vulnerable, safeguard financial sector stability, and strengthen governance and growth potential. The Executive Board’s decision will enable an immediate disbursement equivalent to SDR 254 million (about US$333 million) and catalyze financial support from other development partners.
Following the Executive Board discussion on Sri Lanka, Ms. Kristalina Georgieva, Managing Director, issued the following statement:
“Sri Lanka has been facing tremendous economic and social challenges with a severe recession amid high inflation, depleted reserves, an unsustainable public debt, and heightened financial sector vulnerabilities. Institutions and governance frameworks require deep reforms. For Sri Lanka to overcome the crisis, swift and timely implementation of the EFF-supported program with strong ownership for the reforms is critical.
“Ambitious revenue-based fiscal consolidation is necessary for restoring fiscal and debt sustainability while protecting the poor and vulnerable. In this regard, the momentum of ongoing progressive tax reforms should be maintained, and social safety nets should be strengthened and better targeted to the poor. For the fiscal adjustments to be successful, sustained fiscal institutional reforms on tax administration, public financial and expenditure management, and energy pricing are critical.
“Having obtained specific and credible financing assurances from major official bilateral creditors, it is now important for the authorities and creditors to make swift progress towards restoring debt sustainability consistent with the IMF-supported program. The authorities’ commitments to transparently achieve a debt resolution, consistent with the program parameters and equitable burden sharing among creditors in a timely fashion, are welcome.
“Sri Lanka should stay committed to the multi-pronged disinflation strategy to safeguard the credibility of its inflation targeting regime. As the market regains confidence, the authorities’ recent introduction of greater exchange rate flexibility will help to rebuild the reserve buffer.
“Maintaining a sound and adequately capitalized banking system is important. Implementing a bank recapitalization plan and strengthening financial supervision and crisis management framework are crucial to ensure financial sector stability.
“The ongoing efforts to tackle corruption should continue, including revamping anti-corruption legislation. A more comprehensive anti-corruption reform agenda should be guided by the ongoing IMF governance diagnostic mission that conducts an assessment of Sri Lanka’s anti-corruption and governance framework. The authorities should step up growth-enhancing structural reforms with technical assistance support from development partners.”