Sri Lanka Uses IMF Loan to Repay Indian Credit Line

Sri Lanka has received a USD121 million tranche of its IMF loan, which it has used to repay an Indian credit line. According to State Minister of Finance Ranjith Siyambalapitiya, the amount was paid yesterday, and unlike previous IMF loans, the money came to a Treasury account. Siyambalapitiya added that Sri Lanka has been granted permission to use IMF funds for budgetary purposes. India provided the credit line to Sri Lanka after the country defaulted on its debt in April 2022, but the funds are outside the debt restructuring parameters. The government is currently in talks with India to repay the funds separately.

Sri Lanka to Make Presentation to Creditors on IMF Deal

Sri Lanka’s Finance Ministry has announced that the country will make a presentation to its creditors on March 30 after securing a four-year IMF reform program. The presentation will be chaired by the Governor of the Central Bank of Sri Lanka, Nandalal Weerasinghe, and the Secretary to the Treasury and Ministry of Finance, Economic Stabilization and National Policies, K M Mahinda Siriwardana. The ministry stated that Sri Lanka is fully committed to completing the IMF program successfully, and the government has implemented an ambitious reform agenda to ensure fiscal consolidation, increase tax revenues, rebuild its foreign reserves, improve economic governance, and strengthen the Central Bank’s independence. The government aims to continue engaging with all its creditors with full transparency and goodwill to resolve the public debt situation swiftly.

IMF Loan for Sri Lanka

The International Monetary Fund has approved a 48-month extended arrangement under the Extended Fund Facility (EFF) of SDR 2.286 billion (approximately US$3 billion) to support Sri Lanka’s economic policies and reforms. The EFF aims to support the country’s macroeconomic stability, enhance its international reserves, and create fiscal space to address socio-economic challenges. The IMF program includes a comprehensive reform package, including fiscal and monetary policies, structural reforms, and social safety nets. The IMF has acknowledged Sri Lanka’s economic challenges, such as high public debt, low tax revenue, weak external position, and the ongoing pandemic’s impact. The program’s success depends on the government’s full commitment to implementing the necessary reforms, good governance, transparency, and cooperation with all stakeholders, including creditors.

Sri Lanka’s Economic Challenges

Sri Lanka’s economy has been facing multiple challenges over the past few years, leading to a balance of payment crisis and a debt default. The pandemic has further aggravated the country’s economic woes, affecting tourism, trade, and remittances. According to the Central Bank of Sri Lanka, the country’s GDP contracted by 3.6% in 2020, and inflation increased to 4.6%. Sri Lanka’s external position remains weak, with a current account deficit of 2.6% of GDP in 2020, and its foreign reserves have declined significantly. Sri Lanka’s public debt has risen to 105% of GDP, and its debt servicing costs are high, accounting for approximately 50% of government revenue. Sri Lanka’s tax revenue is low, with a tax-to-GDP ratio of around 10%, compared to the regional average of 15%.

IMF Program Reforms

The IMF program aims to address Sri Lanka’s economic challenges by implementing comprehensive reforms in various areas. The program includes fiscal and monetary policies to reduce the budget deficit and control inflation. The government aims to increase tax revenue by broadening the tax base, improving tax compliance, and rationalizing tax exemptions. The program also includes structural reforms in state-owned enterprises, the financial sector, and the public sector to improve efficiency, transparency, and governance. Sri Lanka’s energy sector is also a priority area

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