Sri Lanka fails to reach agreement to unlock next IMF bailout tranche

Sri Lanka and the IMF have failed to reach an agreement that would pave the way for the next tranche of funds under a $3bn lending programme designed to steer the country out of its economic crisis.

An IMF team concluded a two-week visit to Sri Lanka on Wednesday without securing the so-called staff-level agreement that is required to unlock the next $333mn disbursal under the deal, which was first agreed in March. While Sri Lanka has made “commendable progress” implementing economic reforms, the IMF said, measures to improve tax and revenue collection had fallen short of expectations.

The shortfall “could weaken the government’s ability to provide essential public services; and undermine the path to debt sustainability,” it said. “The team will continue its discussions . . . with the goal of reaching a staff-level agreement in the near term.” The IMF’s board will not disburse the next tranche until officials reach a staff-level agreement.

The delay threatens to slow Sri Lanka’s recovery from the worst economic crisis in its history. The country of 22mn people last year became the first Asia-Pacific nation to default on its foreign debt in more than two decades following a sharp fall in its foreign reserves, leading to mass protests and shortages of essential goods such as fuel and medicine. Sri Lanka is also in the process of restructuring its foreign and domestic debt, another condition of continuing with the IMF programme.

Both foreign and domestic debt totalled about $42bn each as of the end of 2022. But progress on the negotiations has been slowed in part owing to tensions between its creditors, which includes geopolitical rivals such as China and India as well as commercial bondholders. A Sri Lankan official acknowledged that some of the planned reforms had taken “longer than we’d hoped” but said the country had “made good progress” in turning around its economy.

Tax collection is a particular concern. Sri Lanka’s former president Gotabaya Rajapaksa had cut taxes after being elected in 2019, plunging the country’s tax-to-GDP ratio into one of the lowest in the world at about 8 per cent. The move deprived authorities of vital revenue, contributing to its default. Rajapaksa was forced out of office by huge protests last year.

His successor, Ranil Wickremesinghe, has taken a number of unpopular steps including raising some taxes, but the IMF said that these measures had fallen short of what was required. “To increase revenues and signal better governance, it is important to strengthen tax administration, remove tax exemptions and actively eliminate tax evasion,” the fund said.

FT

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