Transcript

Press Briefing Transcript: Staff Level Agreement on the Fourth Review of Sri Lanka’s Reform Program Supported by the IMF’s Extended Fund Facility Arrangement

April 29, 2025

PARTICIPANTS: 

EVAN PAPAGEORGIOU, Mission Chief for Sri Lanka, IMF

PAVIS DEVAHASADIN, Communications Officer, IMF

MARTHA TESFAYE WOLDEMICHAEL, Resident Representative in Sri Lanka, IMF

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DEVAHASADIN: I welcome you to the press conference on Sri Lanka, the Staff-Level Agreement of the Fourth Review of the economic program support by the EFF.  Today we have here Mr. Evan Papageorgiou, IMF Mission Chief for Sri Lanka.  He's joined by Martha Woldemichael, IMF Representative in Sri Lanka. 

Again, this is on the record.  The transcript will be available later.  We have a lot of people here, so we're just going to start with Mr. Evan giving the brief remarks and then we move on to the Q&A session.  All right, Evan, over to you on the remarks.

PAPAGEORGIOU: Yeah, thank you. Thank you, Pavis. Thank you also to Martha for being here.  And hello, everybody.  Good evening to those of you in Sri Lanka and good morning to the few folks here in Washington.  I thank you all for being here today.  I would have preferred to be with you in Colombo, but unfortunately this is not feasible this time.  We will have to talk through a screen. 

By way of short introduction, as you heard, my name is Evan Papageorgiou.  I am the new Mission Chief for Sri Lanka for the IMF.  And some of you may know already that there has been a change in Mission Chief with this review, which is part of a routine rotation of people in the team.  I look forward to seeing some of you again.  I already had a chance to meet you a few weeks ago, or otherwise to meeting you all next time we're in the country.  We had the opportunity to be in the country.  I led a team of economists visiting Colombo earlier this month, where we had productive discussions with the authorities.  These discussions continued here last week here in Washington, D.C., on the occasion of our Spring Meetings. 

Okay.  So, as you may be aware, we have reached a staff-level agreement with Sri Lankan authorities on key economic policies, marking an important milestone toward concluding the Fourth Review of Sri Lanka's reform program supported by the IMF's Extended Fund Facility. 

The staff-level agreement is contingent on two conditions.  First, the implementation of prior actions relating to restoring electricity cost-recovery pricing and ensuring proper function of the automatic electricity price adjustment mechanism.  And second, the usual completion of financing assurances review by multilateral and bilateral partners.  After successful implementation of these conditions and approval from the IMF Executive Board, Sri Lanka will unlock approximately USD $344 million in financing.  This funding will be crucial as the country navigates the recovery from economic challenges. 

We are now halfway through the four-year EFF program, and I'm very pleased to stand before you today to share significant development regarding Sri Lanka's economic journey.  The performance of the reform program has remained strong overall.  Economic growth is on the rebound.  We are seeing advancements in revenue mobilization, reserve accumulation is proceeding, and structural reforms continue, and some of them are well underway. 

Very important to note also that debt restructuring is nearly complete and the government's commitment to program objectives remains steadfast, and we got new assurances of this as recently as last week.  However, we must also acknowledge the significant downside risks posed by global trade policy uncertainty.  Should these risks materialize, we are prepared to work collaboratively with the authorities to assess their impact and formulate appropriate policy responses within the framework of the IMF-supported program.

The country's achievements under the ambitious reform agenda have been commendable.  The rebound in growth, for example, 5 percent year-on-year real growth in 2024, is a testament to the country's resilience and determination and remarkable turnaround.  Furthermore, there has been significant improvement in the revenue performance, with revenue to the GDP climbing to 13.5 percent in 2024 from 8.2 percent in 2022.  Gross official reserves have also risen to $6.5 billion in end of March 2025, given the very good and strong FX purchases by the Central Bank of Sri Lanka.

Now, as we move forward, it is essential that the government continues to prioritize sustained revenue mobilization efforts and prudent budget execution.  These measures are vital in preserving and continuing to build fiscal space and ensuring that there is room to respond to any shocks that may arise.  To that end, restoring cost-recovery electricity pricing is essential to minimize fiscal risks and enable appropriate electricity infrastructure and investments. 

The tax exemption framework should be well designed to reduce fiscal costs and corruption risks while at the same time enabling necessary growth for the country.  Reforms to boost tax compliance are important to deliver revenue gains without resorting to additional tax measures. 

We also recognize the critical responsibility of the government to protect the most vulnerable members of society during these uncertain times.  Improving the targeting adequacy of social safety nets will be a priority as they strive to provide support where it's needed the most. 

In conclusion, the sustained commitment of the government to the program objectives is commendable.  It ensures continuity and puts Sri Lanka on a path to continuing success and strong recovery.  We are determined to continue working with the authorities to safeguard their hard-won gains and pave the way forward towards robust and inclusive growth.  Thank you for your attention.  Martha and I look forward to your questions.  Thank you.  Pavis, back to you. 

DEVAHASADIN: Thank you, Evan. We now move on to the Q&A section. But before we begin, I would like to say that for those who just joined, this session is being recorded.  Therefore, the transcript will be posted later, and otherwise we move on to the Q&A, and I just want to remind you to keep your questions short because we have a full house so we can give opportunity to other participants as well and stay on topic.  We can also follow up with you afterwards.  But please be mindful that we are discussing the SLA - the Fourth Review, today. 

May I call -- actually I saw your hand was up earlier, and then you put it down.  May I call you for the first question from Economy Next?

QUESTIONER: Thank you.  Yes, my question is there has been some delay on the restructuring.  How concerned is the IMF on SOE restructuring?

DEVAHASADIN: On the restructuring, debt restructuring, right?

QUESTIONER: SOE.

DEVAHASADIN: SOE.

QUESTIONER: state-owned enterprise, yeah. 

DEVAHASADIN: Okay. Anyone else on state-owned enterprise? And you can also just jump in.  I see some hands up, but I'm not sure if those participants are talking about -- would like to talk about SOE, but otherwise we want to take questions on SOE first. 

QUESTIONER: If I may add on the SOEs?  Just to add to that, specifically about Sri Lankan Airlines.  How concerned are you about Sri Lankan Airlines?  Because this is something that has been discussed for several years with a lot of other people as well as with the IMF.  Thank you. 

DEVAHASADIN: Okay. Thank you so much.

PAPAGEORGIOU: Yes, thank you. These are good questions. So let me start in general to make some points. 

So under the program there has been, in general, commitment by the government from the beginning of the program until now to strengthen the governance of SOEs, to get to the bottom of their outstanding debt and resolving legacy debt that they -- that's out there -- and implementing those that's relevant to implementing cost recovery pricing to ensure that they remain financially viable.  These are all very important conditions because they will reduce fiscal risks to the government, to the states, and avoid that they become a burden for public finances, ultimately taxpayers, and all Sri Lankans. 

So, within those commitments, it's important to highlight a few that, under the program, these include also containing risks from the guarantees issued to SOEs.  For example, the EFF program includes indicative targets, which are setting ceilings on total and foreign currency treasury guarantees for SOEs.  Another condition is to refrain from new FX borrowing by non-financial state-owned enterprises that already have limited FX revenue so that we don't introduce more wrong-way risk into these entities.  And also, another one, obviously very important one, is making SOEs more transparent.  You may be aware that we have been advocating and mandating to publishing audited financial statements for the 52 largest SOEs in a timely manner, and that will help bring more light and greater scrutiny. 

It is also important to ensure that consumers of services of these SOEs receive the best value for the price they pay.  And obviously, that relates to a wider range of SOEs, including also the electricity and the fuel sector.  And this is the same thing as you would expect from a private company.  In other words, you would want SOEs run in the most efficient manner purely on commercial basis and ensuring that they are dependable and, of course, that they are free of corruption.  That is greater big disclosure, good disclosure to that extent. 

There was a question on Sri Lankan Airlines.  So, we understand that the authorities are underway in preparing a medium-term strategic plan to restore Sri Lankan Airlines' operational viability and to resolve its legacy debt.  We know that the current budget, the 2025 budget, has set aside 20 billion rupees to pay off some of the debt of the airline.  And we are also aware that Sri Lankan Airlines has also hired a financial advisor to restructure its international bond.  So, these are all steps in the right direction.  But we think these need to pick up pace and take up a little bit faster pace so we can have a good resolution of all these outstanding issues.  So, in general with SOEs, we think there is a way forward, and we want to see more progress there. 

Thank you.  That was a good question.  Pavis, back to you. 

DEVAHASADIN: Thank you, Evan. We have hands up.

QUESTIONER: Thank you, Pavis, and thank you, Evan, for your presentation.  From News 1st here.  The conditions of the Fourth Review include implementing fire actions related to electricity cost-recovery pricing and ensuring that the automatic electricity price adjustment mechanism functions properly.  In your meetings with the government, do you see this realizing anytime soon?  Because according to the statement that was released earlier, it says that this condition is yet to be met.  Thank you. 

PAPAGEORGIOU: Thank you. Thank you, I don't know if -- should we take another question? Maybe related to electricity to bunch them up a little bit? 

DEVAHASADIN: Yep. Anyone else on electricity just come in please.

QUESTIONER: What we expected the timeline to complete the required by actions such as electricity pricing and financing assurance for Board approval?

QUESTIONER: I have also question on electricity.  Now, the current problem seems to have been coming from, because of a price cut by the regulator, which the utility didn't ask for.  So, is there any attempt to give technical assistance or something so that the way the regulator calculates the profits or how they deal with the price proposal of the utility is improved so that this kind of thing doesn't happen again?

PAPAGEORGIOU: Thank you for the question. Let me first say that the issue of electricity is one where both the government and us see eye to eye, and there's strong commitment in seeing these reforms take place because, as you know very well, electricity and dependability of electricity and the high price of electricity have been an issue for a very long time in Sri Lanka. So, government is committed to seeing, to taking the reforms and owning those reforms and making significant progress. 

So yes, during the review mission discussions that we had in Colombo earlier in April, earlier this month, and here in Washington last week, we discussed many issues.  Our assessment is as early as back in February, when we went to the Board for our Third Review, our assessment of the time, and still is the same, is that the continuous structural benchmark on electricity cost recovery pricing is still not met.  And that means that the price of the tariff - it does not match, does not create enough of an ability for the utility, for the CEB, to be able to meet its costs, the generation costs, and transmission and distribution. 

In addition to that, the automatic tariff adjustment mechanism based on the bulk supply transaction account, the BSTA, has not operated as we envisaged.  And the April tariff revision that was meant to take place in the second quarter of this year was not implemented.  So as a result of that, given the criticality of electricity cost recovery and under the program, we have proposed, IMF has proposed, the introduction of prior actions relating to restoring electricity cost-recovery pricing and ensuring proper function of the automatic electricity price adjustment mechanism, the BSTA, that I mentioned a few moments ago. 

The implementation of these prior actions is an important milestone as a requisite, if you will, for the completion of the Fourth Review.  And in terms of the timing; there was a question -- of course, we defer to the authorities and to the regulator, the PUCSL, on the exact timing for implementing these actions, these prior actions. But we urge them to do so as soon as possible so that the utility company, CEB, is not incurring financial losses on a forward-looking basis.  In other words, we should avoid, the authorities should avoid, a situation where debt is building up at the CEB, so that the utility company does not become again a significant contingent liability to the government and a burden to the taxpayer. so, it doesn't become a fiscal drought. 

I think this is well understood by the authorities.  It has been explained time and time again.  It's a core pillar of the program that once it is resolved and properly held, it will help fiscal sustainability, and it will make electricity price generation more dependable.  And down the road this will allow for more stability, for more investment, and for the necessary steps to see electricity prices coming down. 

Hopefully that answers your question, but I'm happy to follow up on anything else.  Thank you.  Pavis, back to you. 

DEVAHASADIN: Thank you, Evan.

QUESTIONER: I don't think my question about whether you consider technical assistance to the regulator was answered.  I also have another question if you can answer. 

PAPAGEORGIOU: Sure, sure. So yeah, thank you. There's no technical assistance at the moment in terms of the electricity price generation or any other issues related to this.  In general, the energy policy and the policy for the energy sector, we think the pillars are -- there should be a cost reflective energy pricing which is a building block of the program, and we think that within that there should be a greater stability, but it will allow for more reforms. 

So now we know we understand that there are some proposed amendments to the Electricity Act that are underway, and these are expected to reflect the authority's strategy to reform the electricity sector.  We understand also there is an intention to have unbundling of generation of transmission and distribution of power.  We obviously take note that there has been action and proposals for greater investment, including also for solar energy projects.  Again, we're not advising exactly on these issues, but we look forward to seeing more. 

Now, of course, on the strategy that should be supported by the key stakeholders.  I know that other multilateral, several development partners such as the World Bank and ADB are closely involved on electricity, and they are providing technical assistance to Sri Lanka. 

So I think that goes to your point. Did you have another question as well? 

QUESTIONER: Yes.  Regarding the -- can you give us any idea about the timing of the review that might take place?  And also, when you said, policy responses that may be needed to meet the tariff problem, what kind of things were you thinking on?  Is it likely to jeopardize the targets and were you planning to give any waivers or what kind of policy responses?

PAPAGEORGIOU: When you say tariffs do you mean not electricity tariffs, you mean export tariffs, right?

QUESTIONER: No, no, sorry.  You said because of the tariff shock, from possible tariffs from the U.S. 

PAPAGEORGIOU: Yes, that's right.

DEVAHASADIN: U.S. tariffs.

QUESTIONER: Yeah.  So then that Sri Lanka might have to do some policy responses.  What kind of policy responses were you thinking?  And also, it jeopardizes the targets in the IMF performance criteria, will they be kind of given waivers? 

PAPAGEORGIOU: Thank you.

DEVAHASADIN: Before you begin, I would like to read this question. How do you see the impact U.S. labor tariff on Sri Lanka's ability to secure and sustain the SLA with global partners?

PAPAGEORGIOU: Yeah, great. Thank you; these are good questions. In terms of the timing, obviously things are still underway.  This is only a staff-level agreement, which means we have agreed on principle on many things of the underlying Fourth Review and conditions of the prior actions that I mentioned a few minutes ago.  I think there's good momentum from the authorities' and everybody else's point of view in completing the review.  That takes a little while because we understand a lot of these issues are still being discussed and there is more work to be done, both from the authority side and from our side as well.  It's a long process, as you probably know, in terms of us consulting and redrawing our numbers and our assumptions and having a great confidence in the direction of policy reforms and of the outlook and everything else.  I would say that it will take a little while, maybe a couple more months at least, in terms of finalizing the review.  So hopefully in two months' time or so, by, let's say, June, we should be able to have some more news for you on this front. 

Now, on the issue of U.S. tariffs and how does it affect the country?  Obviously, as I mentioned, trade policy uncertainty is one of the issues that we have discussed quite extensively with the authorities on what could that mean for Sri Lanka's economy and economic performance.  We know that, obviously, the authorities are committed to achieving program objectives and to see how the targets are being met.  They have also committed to addressing any sort of underperformance or deviation for program targets with remedial measures.  So, we think that we take this commitment very seriously, and we note their strong impetus for delivering on those. 

Obviously, the global trade policy uncertainties, as I mentioned, is a significant risk.  All I can say at this point is that if these risks materialize, we will work with the authorities to assess the impact of those shocks, and we will support the country in formulating specific policy responses within the contours of the existing IMF program.  We have very frequent discussions with the authorities.  We were discussing, we were talking to them as recently as last Friday, as a few days ago.  We continue talking to them on a daily basis.  Martha talks to them on a constant basis.  And we continue conducting weekly monitoring meetings with the entire team, both here in Colombo as well, so that we can ensure that program performance remains on track. 

This is all I can say for the moment, but it is very important to note also that the Sri Lankan authorities, the Sri Lankan government, have made great progress in establishing greater connection with bilateral trade partners, including the United States.  And we encourage more action and greater discussion in ensuring that there is a good outcome from these discussions and that the trade policy uncertainty gets resolved and there's greater certainty. 

DEVAHASADIN: Thank you. I just got the five minutes remaining warning. I would like to open the floor to anyone who hasn't asked any questions.  Please feel free to jump in.  Otherwise, I'll go back to the hand.  Anyone else who hasn't asked any question?  Well, all right, I see one hand up.

DEVAHASADIN: Thank you. We'll come back to you.

QUESTIONER: Thank you.  I just have a question.  It's kind of a follow-up to Evan's previous answer.  You talked about a very limited response that you can give talking about trade policy and the impact of the U.S. tariffs.  But you did say that Sri Lanka had expressed a sort of a commitment to work and work towards the targets it has agreed with the IMF.  But in the most recent weeks post those tariff announcements, targets, as much as you said that they have expressed a willingness to work within the framework - I think you said, within the contours of the agreement - has Sri Lanka expressed concerns about reaching those targets, particularly because these tariffs are believed broadly to have a potential impact on its export earnings?  Obviously, it's foreign currency earnings and things like that.  So how much of a concern have you heard from the Sri Lankan authorities?  And what is the sort of leeway or the kind of flexibility that Sri Lanka would have within the agreement with the IMF?  I'm sure you have this with a lot of sort of your agreements, but, yeah, where Sri Lanka is concerned, how do you see it?  Thank you. 

PAPAGEORGIOU: Thank you. That's a good question. It follows through a little bit from my previous answer, as you said.  I don't know, given that we don't have much time, let me go ahead and answer this and maybe we can give five more minutes, Pavis, to other people to ask questions as well. 

DEVAHASADIN: Sounds good.

PAPAGEORGIOU: So, first of all, every review, now we're on the Fourth Review, of the program is an opportunity to assess the economic developments, to review program targets, and to determine the reform agenda and the reform measures that the authorities plan for the period ahead. It just happened that in this review we have a significant trade policy shock. So, in these discussions, we've had an understanding of what are the concerns and what is the kind of shock.  And by the way, this is something that we also, as Fund staff, are trying to implement, to understand, to comprehend, and to put into our outlook. 

So obviously, the 44 percent tariff on Sri Lanka that was announced on April 2nd would have a significant impact, and the authorities understand this very well.  The impact obviously will be on the apparel and rubber industries.  Obviously, as you know very well, these account for a very large share of the country's exports to the United States.  I believe it's almost three-quarters, or over 70 percent.  And also, the real sector implications of these are very important because these two sectors, apparel and rubber, employ a lot of workers, in Sri Lanka. Just the apparel industry alone is over 300,000 workers or 320,000 workers.  So, the 90-day pause that was announced has allowed the authorities to engage constructively with the United States.  And we take, take very positive note on this. 

Now, within, in general, as I mentioned, the global trade policy uncertainty for any small open economy and definitely for Sri Lanka poses significant downside risks.  For these discussions, we understand, obviously, the issues that arise and how they should be baked into the program.  If there is any substantial risk that may pan out either on the back of tariffs or some other disruption, we will work with the authorities to incorporate them to assess their impact and put them into policy responses. 

At this point, it will be a little premature of me to talk about specific issues, but we've had a lot of discussions, and we think that the authorities are doing the best they can to address these issues.  It's important to also mention that here that any time is a good time for implementing more reforms for discussing greater options towards having more trade policy responses.  And we believe that Sri Lanka should continue exploring also additional ways in making its exports more marketable and appealing to a wider range of counterparts. 

DEVAHASADIN: Thank you, Evan. I'll give the final question. We are running out of time, but I think we have enough time for one last question.

QUESTIONER: Thank you.  It's about the tax revenues.  According to the 2025 budget, much of the tax revenue is expected from vehicle imports, and we have -- from the dealers that of the vehicles have been imported in the last two months, about 75 percent have been sold.  Of course, even though 25 percent may not have been sold, still the government has got revenue for those because they have been cleared through customs. That is no issue, but it would probably have implications for future demand.  So, the market is sort of not as vibrant, as there doesn't seem to be a huge pent-up demand.  How concerned are you that this one single item in the budget, which is sort of going to underpin tax revenue, may not materialize this year?  Thank you.  Thank you.

PAPAGEORGIOU: So obviously the authorities have made significant progress on creating greater opportunities for revenue and for collecting more. You may very well know that the situation was far worse in terms of tax revenue, as I mentioned in my earlier remarks, as early as couple of years ago. So obviously there is definitely progress. On this year's discussion,

I think there is a lot of the progress; has been a positive one.  There has been greater progress towards ensuring more revenue that could be collected from a range of measures.  You mentioned very accurately that the lifting of the import ban on motor vehicles is a very, very important. I would say the primary measure underpinning the revenue package.  We saw that, also in the budget, it is expected to yield 1.2 percent of GDP in 2025.  And that's about 80 percent of the 1.5 percent of GDP in all tax revenue.  So obviously, as you mentioned, this is very important to get right and to continue with the momentum. 

We note from the latest data that we have monitoring and we're getting is that there is actually a good momentum on those motor vehicle imports.  So as my latest data -- I was trying to find them -- from what I remember, there has been quite a lot of good increase in the letters of credit.  I believe it's around USD $350 million that were open.  These are letters of credit that are attached to importing vehicles.  So, we think that the associated revenue that will be incurred from those imports is starting to come on pace, and that's a very important and encouraging sign.  So, we look forward to seeing more. 

Of course, I mentioned a moment ago as well that if there are signs that -- that there is underperformance of revenues or if there is a revenue shortfall, we have discussed with the authorities, and they are committed to implementing contingency revenue measures, and this will go a long way in ensuring fiscal sustainability and greater revenue.  Thank you. 

DEVAHASADIN: Thank you, Evan. Unfortunately, we're at time. Before we close, Evan, do you have any parting words? 

PAPAGEORGIOU: No, I thank you very much. I thank you all for being here. I look forward to continuing to engage with you, and Martha and I know that we have a great relationship with all of you and a frequent interaction.  We are happy to continue taking your questions.  We now are moving forward completing the Fourth Review in the next couple of months, so we will certainly communicate more as we get towards that goal.  We will also try to have another similar discussion and press conference at the end of that review if all goes well.  Let me just mention again that we are fully committed in supporting the economy and the Sri Lankan authorities, both in the current issues that they are facing and just more broadly on formulating the appropriate policy responses and the necessary form.  Thank you all very much for being here.  I wish I was in Colombo, but I look forward to seeing you again in the next few months.  Thank you.