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Risks of IMF Program in Sri Lanka

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DeepFreakingValue

DeepFreakingValue
Manager - Equity Analytics
Manager - Equity Analytics

“Program Risks” which are termed “exceptional” by the IMF staff themselves, will almost certainly materialize and negate the entire program.

Risks of IMF Program in Sri Lanka Gb-imf10

The IMF Staff candidly acknowledge in their Report of March 2023 that the Risks of Sri Lanka’s Program are “exceptionally high”.  

This is how the Report highlights the risks (page 2).

“Program Risks:

“Risks to program implementation are exceptionally high, given
Risks of IMF Program in Sri Lanka 25b6 Complex debt restructuring process,
Risks of IMF Program in Sri Lanka 25b6 Unfavorable external environment,
Risks of IMF Program in Sri Lanka 25b6 Elevated risks of persistently high inflation, and
Risks of IMF Program in Sri Lanka 25b6 Challenging political and social situation.

Given Sri Lanka’s weak track record of reform implementation, the program runs significant risks of slippages regarding fiscal consolidation, revenue mobilization, and reserves buildup.

A deeper crisis induced by a further economic fallout, the weakened banking sector, exchange rate pressure, and loss of market confidence could also complicate program implementation. In this regard, contingency plans are crucial and policies should remain agile to adjust to the evolving circumstances”.

It is as if the IMF Staff have already prepared the script to explain the failure of the Program when (not if) it occurs.

Risks of IMF Program in Sri Lanka 25b6 The IMF Staff have themselves admitted that almost every Program component is fraught with exceptional risks, which appears to indirectly suggest that failure is imminent.

Risks of IMF Program in Sri Lanka 25b6 The IMF clearly warns that a “deeper crisis induced by a further economic fall-out, the weakened banking sector, exchange rate pressure, and loss of market confidence could also complicate program implementation”. This statement aptly describes the dangerous nature of this fragile IMF Programme.  

The crippling effect of this Program is already evidenced by the massive contraction of the “Real Economy” where there has been a severe reduction of USD 523 in the per capita income from USD 3,997 in 2021 to USD 3,474 by 2022.  

Understandably, the IMF staff appear to be highly concerned about the risks faced by themselves as well, which is captured by their Report.

At Page 31, the IMF Report states:
“Enterprise risks are high but are partly mitigated by the program design and CD support. The Fund faces three types of enterprise risks.

Risks of IMF Program in Sri Lanka 25b6 First, financial risks arise from significant risks to Sri Lanka’s capacity to repay.
(Comment: That means Sri Lanka may not have the ability to repay the IMF debt).

Risks of IMF Program in Sri Lanka 25b6 Second, operational risks stemming from social unrest and socio-political tensions, which may pose risks to the operations of IMF staff missions and the field office if they escalate.
(Comment: That means they fear their own colleagues’ well-being and safety in Colombo), and

Risks of IMF Program in Sri Lanka 25b6 Third, reputational risks would be of concern if the public perceives policies under the program as too tight, weakening public support for the program.
(Comment: That means they are concerned as to the IMF’s own reputation being tarnished because of risk re. the design of the programme).

In summary, in addition to current “economic contraction” and other severe issues confronting the Sri Lankan Economy, the following outcomes are likely to be experienced in the foreseeable future when Sri Lanka follows its 17th IMF Program.

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Post Fri Oct 13, 2023 6:26 pm by God Father

2024 Budget - What's in store for Sri Lanka s per IMF Conditions
(Page 107 -110 IMF Country Report Sri Lanka)

- Parliamentary approval of the 2024 Appropriation Act and the spending allocations in line with program parameters (Page 64-71)
- Submission to Parliament of a new PFM law, in consultation with IMF staff, that will authorize the budget formulation process, roles and responsibilities of relevant agencies, and information and accountability requirements
- Start estimating and publishing the direct costs imposed by tax incentives granted under the Strategic Development Projects and Board of Investment Acts.
- Revamp the VAT system by abolishing the vast majority of exemptions.
- Take measures to significantly speed up valid VAT refunds and abolish the SVAT system.
- Introduce automatic indexation of excises to inflation.

Further:
Government expected to bring the tax to GDP ratio to at least 14 percent by 2025, the authorities commit to revamping the VAT system before 2024, by removing almost all product- specific VAT exemptions. They also commit to significantly speeding up valid VAT refunds and abolishing the Simplified VAT (SVAT) system.13 Finally, the authorities commit to introducing a property tax, as well as a gift and inheritance tax before 2025. (Page 13)

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