IMF’s Senior Mission Chief for Sri Lanka Peter Breuer (centre)  with Deputy Mission Chief Katsiaryna Svirydzenka (left) and IMF’s new Resident Representative to Sri Lanka Martha Tesfaye Woldemichael – File photo

• IMF Senior Mission Chief for Sri Lanka Peter Breuer highlights stark contrast between economic crisis in 2022 and its revival since implementing painful, but necessary reforms
• Insists on continued commitment to reforms for long-term stability 
• Affirms Sri Lanka regaining 40% of income lost over past five years under EFF program
• Outlines two key priorities before next review — restoring cost-reflective pricing in energy sector and ensuring Budget 2025 aligns with program targets
• Urges to finalise debt restructuring deals with Japan, India and China
• Opines tax revenue improves from 7% to 12.4% of GDP, but remains key priority
• Sees property taxes as necessary  though requiring clarity on implementation
• IMF Deputy Mission Chief for Sri Lanka Katsiaryna Svirydzenka emphasises importance of social spending protections under Aswesuma program
• Highlights need to prevent SOEs from accumulating unsustainable debt, suggesting they can be managed efficiently either as SOEs or through partial or full divestment

By Charumini de Silva

The International Monetary Fund (IMF) yesterday acknowledged the significant progress made by Sri Lanka in recovering the economy, whilst insisting on maintaining momentum is critical to securing long-term stability.

The assessment came as the IMF’s Executive Board completed the third review under the 48-month Extended Fund Facility (EFF), unlocking a $ 334 million tranche, bringing total disbursements to $ 1.34 billion under the $ 2.9 billion bailout program.

Speaking at a virtual media briefing, IMF Senior Mission Chief for Sri Lanka Peter Breuer highlighted the stark contrast between the country’s economic collapse in 2022 and its revival since implementing painful, but necessary reforms.

“When I first arrived in June 2022, people were queuing for basic necessities and economic activity had collapsed. In real terms, the country lost about 10% of its GDP. Since implementing the program in 2023, Sri Lanka has regained 40% of the income lost over the past five years,” he said.

He also noted that in a short span of time, Sri Lanka had a significant recovery, with the most recent growth figure at 5.5%. “As the economy recovers, it will have a positive impact on income and the poverty rates should decline. It will also be more attractive for skilled workers to remain in Sri Lanka or return,” he added.

However, while economic opportunities are returning, the IMF Senior Mission Chief cautioned against policy missteps, stressing the need for consistency in reforms.

Breuer outlined two key priorities for the next review, which include: restoring cost-reflective pricing in the energy sector and ensuring that the Budget 2025 aligns with program targets. “These are the two factors that we will be watching very carefully,” he explained, noting that the next IMF mission is expected in the coming weeks to assess progress.

A major concern raised by him was the recent electricity tariff reduction which came into effect in January, citing that it could lead to financial losses for the Ceylon Electricity Board (CEB).

“Although external factors such as rainfall can impact actual costs, maintaining a forward-looking cost-reflective pricing mechanism is crucial to avoid a build-up of losses, which Sri Lanka has experienced in the past,” Breuer warned.

He also said it is imperative to finalise its bilateral agreements with official creditors, including Japan, India and China after the country reached a preliminary agreement of $ 10 billion debt restructuring in June 2024.

Breuer highlighted that insufficient tax revenue was a key driver of the country’s economic crisis. “In 2020, Sri Lanka had one of the lowest tax-to-GDP ratios among middle and low income countries in the world. Since then, significant progress has been made. Tax revenue as a share of GDP has increased by five percentage points, from 7% to around 12.4% last year. While this is a substantial increase, it is by no means excessive,” he said.

He also opined that to ensure that the essential Government services are funded, sufficient tax revenue remains a priority.

On the contentious imputed rental income tax, Breuer clarified that it was originally proposed by the previous administration as part of a broader revenue strategy for 2025, however, the incumbent Government has introduced a modified version aligned with its priorities. “Our staff assessment indicates that these measures are sufficient to meet revenue targets under the program. However, if they fall short, additional revenue measures may be required,” he added.

Regarding property taxes, he noted that such taxes are common worldwide and that preparatory work including sale price registers and valuation databases had been completed. “However, unresolved questions remain over how the tax would be implemented and shared between Local and Central Governments,” Breuer said.

Despite the hardships endured during the crisis, the IMF Senior Mission Chief remained optimistic about Sri Lanka’s recovery, provided that reforms continue without disruption.

“Looking at the broader picture, the hardest adjustments have already been made. Over the last two years, revenues have increased. The current Budget requires only an additional 1.5% in revenue, less than previous years. Moving forward, the process should become easier,” he noted.

However, he stressed that the country’s economic stability depends on continued commitment to reforms. “There is no doubt about the hardship caused by the crisis. We have travelled across the country and met with people, including plantation workers, who shared their income statements and bills. It was evident how severe the situation was. However, the best way forward is to stay committed to reforms, ensuring Sri Lanka’s long-term economic sustainability,” Breuer said.

IMF Deputy Mission Chief for Sri Lanka Katsiaryna Svirydzenka explained the importance of social spending, noting that a dedicated spending floor ensures that vulnerable groups are protected.

“Recent announcements such as increased payments for low income groups, the elderly and differently abled individuals under the Aswesuma program, align with the Government’s commitment to strengthening social safety nets. It is also crucial that coverage under Aswesuma remains above the observed poverty rate,” she said.

She noted that restructuring of State-owned enterprises (SOEs) was also a critical element of the reform program.

Svirydzenka emphasised the need to prevent SOEs from accumulating unsustainable debt burdens, stating that they can be managed efficiently while remaining as a SOE or be partially or fully divested.

She outlined transparency as a key priority, with commitments to publish audited financial statements of major SOEs to ensure accountability.

“To support economic growth, it is essential that consumers receive the best value for the price they pay. This means SOEs must be run efficiently and adhere to strong governance principles. In this regard, we are satisfied with the progress made so far,” she added.

The Economic Transformation Bill was another point of discussion, with Svirydzenka stating that the IMF awaits details on proposed amendments.

“We understand there was a recent announcement that the new Government plans to propose amendments. We look forward to reviewing these amendments and expect them to align with program objectives. This includes the commitment to refrain from granting tax incentives till the Act is revised to establish clear and transparent criteria for such incentives,” she said.