The BGA Sri Lanka Team wrote an update to clients on the outcomes of the country’ negotiations with the International Monetary Fund (IMF) on September 27.

Context

  • Sri Lanka’s negotiations with the IMF ended in a stalemate after the first review of the $2.9 billion bailout package on September 27. The IMF’s decision was based on the country’s 15 percent revenue projection shortfall, a decrease in foreign exchange reserves and a poor administration of tax revenue.
  • Sri Lanka’s total foreign debt topped $56 billion in 2020, more than 100 percent of its gross domestic product. The country has foreign debt payments of roughly $4 billion due this year, including about $1 billion in international sovereign bonds that matured in July.

Significance

  • The lack of an agreement and no fixed timeline for the release of a second tranche of approximately $330 million will challenge the government’s efforts to strengthen its economic recovery. A projected deficit in government revenue by the end of the year may lead to fiscal adjustments affecting public expenditure, which will impede the country’s path to debt sustainability. The government may seek to bolster tax revenue collection and cut government spending to boost the IMF’s confidence and recoup this shortfall. However, these efforts would likely prove unpopular and heighten risks of public backlash and protests.
  • The IMF remains skeptical of Sri Lanka’s economic trajectory despite the country’s efforts to repair the economy. Sri Lanka in March established an extended fund facility and has since shown some signs of tentative economic stability, including a 1.3 percent inflation drop in September, a 12 percent domestic currency appreciation and a $1.5 billion increase in foreign exchange reserves from March to June.

Implications

  • Companies with business in Sri Lanka should carefully monitor public reactions to the temporary halt in IMF funding. The country’s vulnerability to social instability due to public dissatisfaction with the government’s economic governance could harm investor confidence. The government could raise taxes on businesses to compensate for revenue shortfalls, but this would impact profitability and long-term investment decisions. President Ranil Wickremesinghe’s government must regain trust, reassure citizens and ensure economic restructuring before the next IMF review.
  • The 2024 Sri Lanka budget, to be presented in November, will focus on increasing the country’s foreign reserves from the present $3.8 billion to $6 billion. The government plans to fully implement the Revenue Administration Management Information System to increase the number of large taxpayer units. New laws will be introduced to increase the tax net and penalties for those who continue to avoid paying taxes. This will allow Sri Lanka to strengthen its tax administration, remove tax exemptions and signal better governance.

We will continue to keep you updated on developments in Sri Lanka as they occur. If you have any questions or comments, please contact BGA Head of Research Murray Hiebert at mhiebert@bowergroupasia.com.

Best regards,

BGA Sri Lanka Team

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Head of Research

Murray is a top Asia expert and skilled researcher with three decades of experience living and working in Asia. His networks in business, media and government circles are deep and wide-ranging. He is also a senior associate of the Southeast Asia Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Earlier he served as deputy director of the program for six years. Prior to joining CSIS, Murray served for five years as senior director for Southeast Asia at the U.S. Chamber of Commerce where he worked with leading American companies, the U.S. government and Southeast Asian ... Read More