By Sanath Nanayakkare

The Staff-Level Agreement on an Extended Fund Facility (EFF) arrangement worth USD 2.9 billion for Sri Lanka would serve as a credible device in its negotiations with multiple creditors for receiving financing assurances to make its debt restructuring process a success, but the country had to move expeditiously with all other good-faith moves to avoid the crisis becoming worse, Peter Breuer, Senior IMF Mission Chief for Sri Lanka said in Colombo, yesterday.

“The IMF staff-level agreement is a signal from the Sri Lankan authorities of their commitment to implement comprehensive economic reforms; a package now they have committed to the IMF, which will be monitored by the IMF going forward, once the programme is in place. So, this is a credible device for Sri Lanka to show to its creditors that Sri Lanka is serious about engaging in reforms and the country is preparing the ground for economic recovery and is promoting sustainable and inclusive growth,” he said.

” The country can, in fact, refer to the IMF’s EFF programme in its discussions with its creditors because it will show them that Sri Lanka is doing everything it needs to be doing to restore its payment capacity to the international community, through this programme,” he noted.

Breur observed that Sri Lanka was in a special situation because much of its official debt is outside of the Paris Club which is a well-established process that has evolved over many years, and has routines in terms of how to deal with a situation where one sovereign defaults on its debt to other sovereigns.

“However, in the case of Sri Lanka, all of its creditors are not from the Paris Club, and therefore, one needs to think about how to deal with the rest of the debt. A common framework was put in place by the IMF during the course of the Covid crisis because it was thought there would be more defaults in situations like that, but it was limited to low-income countries and Sri Lanka, being a middle-income country, didn’t belong to that common framework. This is why Sri Lanka is a special case to some extent. So solutions appropriate to this situation need to be found. From our perspective, it’s important to move expeditiously from this point onwards. That’s the key here because we want to avoid the crisis becoming worse. So having some kind of forum is important where the debtor and creditors can discuss where the debtor can explain how it got into this situation, and what it is doing to get out of it. At such a forum, creditors would be able to listen and see how other creditors are being treated in the process of debt restructuring. That really is an important step in moving forward and we encourage that process to move forward expeditiously.”

Responding to a question from the media, the IMF said that it had prescribed Sri Lankan authorities to implement major tax reforms including higher personal Income tax and a Wealth Tax – which is generally levied from wealthy asset owners, based on the market value of their assets, minus liabilities.

IMF’s tax prescription includes broadening the tax base for corporate income tax and VAT to reach a primary surplus of 2.3 percent of GDP by 2024. The IMF highlighted the critical need for implementing and expediting major tax reforms to raise fiscal revenue to support fiscal consolidation, Sri Lanka being a country with one of the lowest revenue levels in the world. The IMF said it was looking forward to continuing their engagement in support of Sri Lanka and its people.