IMF review reveals possible delay in new funds for Sri Lanka amid revenue shortfall

The International Monetary Fund (IMF) has indicated that the disbursement of new funds to Sri Lanka might face delays as a result of a revenue shortfall uncovered during its first review under the $2.9 billion bailout package.

Peter Breuer, the head of the IMF delegation, recently concluded a two-week visit to Sri Lanka and revealed that a staff-level agreement had not been reached. As a consequence, the second tranche of approximately $330 million under the lending program is on hold until a staff-level agreement is secured. Notably, no fixed timeline has been established for this agreement.

Sri Lanka’s efforts to implement challenging yet necessary reforms have been acknowledged by the IMF, with tentative signs of economic stabilization becoming visible. However, the road to a full economic recovery remains uncertain, and growth momentum is subdued.

Over the past six months, Sri Lanka has seen a significant drop in runaway inflation to 1.3 percent in September, a currency appreciation of approximately 12 percent, and an improvement in foreign exchange reserves. Despite these positive indicators, the country continues to grapple with revenue generation, with additional measures anticipated in the upcoming mid-November budget.

The IMF expressed concerns that revenue is expected to fall short of initial projections by nearly 15 percent by the end of the year. The statement emphasized that without efforts to address this shortfall, the burden of fiscal adjustment would fall on public expenditure, potentially weakening the government’s capacity to provide essential public services and jeopardizing the path to debt sustainability.

In response to this news, Sri Lanka’s international bonds remained relatively unaffected, trading slightly higher on Wednesday, although they remain in deeply distressed territory, hovering between 46-48 cents to the dollar, according to Tradeweb data.

The IMF outlined the necessity for Sri Lanka to strengthen tax administration, eliminate tax exemptions, and actively combat tax evasion to boost revenues and demonstrate improved governance.

Furthermore, Sri Lanka has taken steps toward meeting debt restructuring requirements ahead of the IMF review by accepting offers to exchange approximately $10 billion worth of defaulted local debt for new bonds. The country has engaged in discussions with bondholders and bilateral creditors, including Japan, China, and India, with the aim of renegotiating its foreign debt after suspending repayments in May of the previous year.

The ongoing discussion of Sri Lanka’s debt restructuring will also be on the agenda at a meeting of the Institute of International Finance and Paris Club, scheduled for later in the day and reported by Reuters news agency.