The IMF and Sri Lanka: A Look at the Future of the Extended Fund Facility

The IMF and Sri Lanka: A Look at the Future of the Extended Fund Facility

The Extended Fund Facility: An Overview

The International Monetary Fund (IMF) has been a crucial player in Sri Lanka’s financial landscape, particularly in light of the country’s recent economic issues. The IMF’s Senior Mission Chief for Sri Lanka, Peter Breuer, has recently discussed the future of the IMF’s Extended Fund Facility (EFF) in Sri Lanka. He stated that there is no fixed timeline for the disbursement of the second tranche of the IMF’s Extended Fund Facility to Sri Lanka. Two essential conditions must be met for the disbursement to take place: an agreement on a set of policies and reforms, and the attainment of debt sustainability through agreements with creditors.

The Conditions for Disbursement

The IMF is currently dealing with a revenue shortfall that they are attempting to address. Breuer emphasized the importance of these conditions being met before moving forward with the disbursement. He highlighted that the process of administrative proceedings would have an impact on the disbursement timeline. Breuer also indicated that although renegotiating the agreement is theoretically possible, it would be a significant undertaking.

The Extended Fund Facility and Sri Lanka

The IMF has approved a 48-month extended arrangement under the Extended Fund Facility, which corresponds to about 3 billion U.S. dollars, to support Sri Lanka’s economic policies and reforms. This arrangement aims to help Sri Lanka, a country facing a severe crisis as a result of past policy missteps and economic shocks, to get back on track.

Key Pillars of the EFF Arrangement

The reform program supported under the EFF arrangement is built on strong policy measures and prioritizes five key pillars. These include an ambitious revenue-based fiscal consolidation, restoration of public debt sustainability, a strategy to restore price stability and rebuild reserves, policies to safeguard financial sector stability, and structural reforms to address corruption vulnerabilities and enhance growth.

The Impact on the Sri Lankan People

The IMF has expressed deep concern about the impact of the crisis on the Sri Lankan people, particularly the poor and vulnerable groups. The IMF is particularly concerned about the economic costs of the delay in the country’s access to external financing. The IMF has welcomed the authorities’ firm commitment to strengthen social safety nets, including through a minimum spending floor, well-targeted spending through the new social registry, and establishment of objective eligibility criteria.

The Challenge of Debt Sustainability

Sri Lanka’s public debt at the 128 percent of GDP as of end 2022 is unsustainable. The country is in arrears to all its external creditors. The IMF Board approval of assistance to Sri Lanka requires assurances from official bilateral creditors that they will provide debt relief and/or financing to restore debt sustainability consistent with the program, as well as an assessment that the authorities are making good faith efforts to reach a private agreement with private creditors.

The Importance of Anti-Corruption Efforts

Finally, the importance of anti-corruption and governance reforms as a central pillar of the EFF support program cannot be overstated. They are indispensable to ensure the hard-won gains from the reforms benefit the Sri Lankan people. The IMF is conducting an in-depth governance diagnostic exercise which will assess corruption and governance vulnerabilities in Sri Lanka and provide prioritize and seek recommendations.