The International Monetary Fund (IMF) will remain a steadfast partner as Sri Lanka pursues stable and inclusive growth that improves the lives of all citizens and future generations, visiting IMF First Deputy Managing Director Dr. Gita Gopinath said in Colombo yesterday.
“As President Dissanayake has said, let us ensure this is the last IMF programme Sri Lanka will need. We agree, and believe this is possible if Sri Lanka stays the course,” Dr. Gopinath said.
Dr. Gopinath said this during her speech delivered as the guest of honour at the conference on ‘Sri Lanka’s Road to Recovery: Debt and Governance’, jointly co-hosted by the Finance Ministry, Central Bank and the IMF, in Colombo yesterday (16).
Acknowledging the Government’s recent implementation of a series of difficult but necessary reforms, Dr. Gopinath said that thanks to bold reforms and the commitment of the Sri Lankan people, substantial progress has been made to restore macroeconomic stability and reduce hardships faced by people. She said that fuel, cooking gas, and medicines are available again, inflation has been brought under control, and economic growth has returned expanding by 5 percent in 2024.
Highlighting the achievements made by the Government on the fiscal front, Dr. Gopinath said that the Government has achieved an extraordinary adjustment and tax revenues have increased by more than two-thirds as a share of GDP.
Pointing out the achievements made resulting from reforms supported by the IMF Extended Fund Facility (EFF) programme, Dr. Gopinath said that Sri Lanka’s experience stands out both for the severity of the crisis the country experienced three years ago, and the remarkable progress that has been achieved in a very short time. She said that the crisis was precipitated by years of declining tax revenues, depleted foreign exchange reserves and an explosive and unsustainable increase in public debt as growth collapsed stating that there were long lines for fuel, severe shortages of basic goods, record inflation, and widespread power outages where for many households, daily life became an exercise in hardship.
“Let us be clear: none of the achievements thus far would have been possible without the courage and sacrifice of the Sri Lankan people. The crisis was costly and painful, particularly for the poor,” Dr. Gita Gopinath said. Acknowledging the Government’s recent implementation of a series of difficult but necessary reforms, such as adjustments in taxation, the removal of unsustainable subsidies, and the restoration of cost-reflective energy pricing, Dr. Gopinath said, “These are difficult measures. They test the social fabric. And yet, they are the foundation of a more resilient future. That is why we must now turn our focus from crisis response to sustainable recovery. There is a lot that is still needed.”
“The Government has also put a strong emphasis on improving governance, which is fundamental for establishing trust with citizens and ensuring sustained growth. Important milestones have been achieved including Central Bank independence, improving public financial management, and strengthening the legal framework for anti-corruption. Our analysis shows that comprehensive fiscal governance and accountability reforms in Sri Lanka can boost GDP by more than 7 percent and reduce the debt-to-GDP ratio by more than 6 percentage points over 10 years.
“Sri Lanka also took the difficult but necessary decision to default on its public debt and pursue a sovereign debt restructuring. These decisive actions on debt have helped ease the burden on the country. External creditors have forgiven US$ 3 billion in debt and restructured another US$ 25 billion, extending repayment over two decades at lower interest rates. Sri Lanka’s bonds are once again included in global indices, and its credit rating has improved,” Dr. Gopinath added.
Dr. Gopinath explained that Sri Lanka’s restructuring effort was shaped by three major challenges.
“The first was the calibration of restructuring targets to ensure sufficient debt relief which was a complex endeavour. Debt sustainability needs to be restored through a combination of a delicate balance between policy adjustments and debt relief, tailored carefully to consider the country’s specific circumstances.
“The IMF worked closely with Sri Lankan authorities to design targets that accounted for the severity of the crisis, while also recognising the country’s strengths, namely, its high levels of private savings, robust tourism sector, and steady remittance inflows.
“As a result of the restructuring, Sri Lanka is projected to reduce its external debt service as a share of GDP by half over the next decade. Additionally, the external and total debt stock are expected to decline by 27 and 34 percentage points of GDP, respectively.”
The second challenge involved coordinating among a diverse and complex group of external creditors.
Dr. Gopinath highlighted the role of the Official Creditor Committee, chaired by France, India, and Japan, in bringing together a wide range of stakeholders. China, while not formally part of the committee, engaged in informal coordination. Despite these efforts, the process was hampered by difficulties in information sharing and concerns over equitable treatment among bilateral creditors. The IMF played a critical role in facilitating dialogue and providing technical support through its “good offices.”
The third and perhaps most sensitive challenge was managing the risks to financial and social stability posed by the restructuring of domestic debt.
“With a significant portion of Sri Lanka’s debt held domestically, including by the financial sector, Central Bank, and public pension funds, the Government had to proceed cautiously. To avoid destabilising the economy, authorities opted against nominal debt reductions, instead focusing on lowering interest rates and extending maturities.”
Dr. Gopinath emphasised that Sri Lanka’s experience has already begun to shape the future of sovereign debt restructuring. It has led to the development of improved methodologies for evaluating State-contingent debt features and inspired new approaches to creditor coordination and instrument design. Alongside other recent restructuring cases, Sri Lanka’s journey has helped catalyze important reforms to the IMF’s debt policies.
(dailynews.lk)
(This story, originally published by dailynews.lk has not been edited by SLM staff)
