Economic Stabilization Program

May 2023 May 2023 Economic Stabilization Program57035-001Sri LankaClosedLoanLoan 4315-SRI: Economic Stabilization ProgramOrdinary capital resourcesUS 350.00millionUS 350.00millionOP1: Addressing remaining poverty and reducing inequalitiesOP6: Strengthening governance and institutional capacityFinance Banking systems and nonbank financial institutions-Central banking systemsPublic sector management Economic affairs management-Public administration-Public expenditure and fiscal management-Reforms of state owned enterprises-Social protection initiatives No gender elements The special policy-based loan SPBL is part of a comprehensive economic reform program led by the International Monetary Fund IMF, which is underpinned by its 3.0 billion Extended Fund Facility EFF arrangement for balance of payment BOP support to i restore macroeconomic stability and debt sustainability, ii safeguard financial stability, and iii undertake structural reforms to unlock Sri Lanka's growth potential. All program measures of the IMF's EFF are mindful of the need to protect the most vulnerable and improving governance. Aligned with the IMF's EFF, the SPBL is critical in building public confidence on macroeconomic stabilization by facilitating government's efforts for fiscal consolidation, restoring price stability, building external buffer, and financial stability at the initial stages of the reform program.Sri Lanka has had persistent fiscal and current account deficits, which resulted in the accumulation of large and ultimately unsustainable public debt. Following a change in government administration in 2019, fiscal imbalances worsened after significant tax cuts in late 2019. Rollback of the automatic fuel price adjustment mechanism and suspension of reform measures to strengthen public finances exacerbated vulnerabilities. A de facto exchange rate peg maintained from April 2021 to early March 2022 discouraged remittances, and a wide gap opened between official and parallel market rates, putting further pressure on foreign exchange reserves. Additionally, economic activity was undermined by a fallout from a temporary ban on import of chemical fertilizer in 2021. Foreign currency constraints caused shortages in essentials and triggered an acute energy crisis featuring prolonged power cuts and fuel shortages. These, along with fallout from the COVID-19 pandemic and the Russian invasion of Ukraine, tipped Sri Lanka into a balance of payment crisis. As a result, Sri Lanka faced steep economic contraction and soaring inflation in 2022. Gross financing needs increased sharply and foreign currency debt-service requirements exceeded foreign exchange reserves. In 2022, the country forced default on its official bilateral and commercial external debt.US 350.00millionNation-wideCCCNot ApplicableNot ApplicableHoshino, TakuyaSectors GroupPublic Sector Management and Governance Sector Office SG-PSMGMinistry of Finance, Economic Stabilization and National Policies--26 Apr 202329 May 2023-29 May 202329 May 2023Total Amount in US million350.00350.000.000.00Reports and Recommendations of the President Loan Agreement Ordinary Resources

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