Verité Research Debt Update - December 2023

Abstract

This issue provides coverage on Sri Lanka’s debt restructuring and progress on the IMF program. This issue also includes analysis on the 2024 Budget and the need for improved governance for sustainable economic recovery. The key developments discussed are ; 1) The Official Creditor Committee for Sri Lanka issued a letter of assurance on 29 November 2023. It enables Sri Lanka to meet some of the criteria set for receiving the second tranche of financing under its current IMF programme. The tranche was originally expected in September but is now anticipated in December. However, the communication does not constitute a substantive agreement on debt restructuring terms; 2) In contrast to the highly unstable macroeconomic conditions of 2022, characterised by soaring inflation and currency depreciation of approximately 60%, 2023 has seen significant stabilisation, particularly in the monetary sector. Inflation and currency depreciation are projected to remain below 3% for the year; 3) Sri Lanka has proposed a budget for 2024, that is broadly in line with its IMF programme targets. It requires the treasury to increase revenue by 45% from the 2023 level. There is very heavy dependence on an increased value-added tax (VAT) — from 15% to 18%— with reduced exemptions, to achieve that target (see Exhibit 3). However, Sri Lanka has never met a budgeted revenue target in the last 23 years (see Exhibit 2); 4) The timeline goal posts have shifted in Sri Lanka’s external debt restructuring. Expectations have now been pushed to the first quarter of 2024, from the original expectation of mid-2023 (see Exhibit 5); and 5) There has been an extraordinary delay in the disbursement of the second tranche of IMF funding to Sri Lanka. It signals significant weaknesses in Sri Lanka’s ability to deliver on the commitments, and meet the expected timelines, in the current IMF programme (see Exhibit 6).