The International Monetary Fund has agreed to keep funding Sri Lanka’s bailout subject to the government implementing its long-delayed fuel price formula aimed at reducing losses at the state-owned Ceylon Petroleum Corporation.
The IMF in a statement said it had reached a “staff level” agreement on the fourth review of the Sri Lankan economy before releasing the next tranche of a $1.5 billion loan spread over 36-months.
The previous tranche of $ 251 million was released in December and which brought the total disbursements so far to $ 760 million under what is known as the Extended Fund Facility (EFF) .
The IMF made it clear that the release of the next instalment of the loan will be conditional on the cabinet of ministers approving the implementation of the fuel pricing formula which is expected to sharply raise prices of petrol and diesel.
However, the pricing formula is also aimed at passing on the benefit of any reduction in world market prices to the consumers. Given the current higher international oil prices and the weaker Sri Lankan currency, retail prices of fuel are expected to rise.
The Ceylon Petroleum Corporation as well as the private Lanka IOC are both making losses on their fuel sales.
“Subject to cabinet approval of an automatic fuel pricing mechanism—consistent with the EFF-supported program, the (IMF) Board is expected to consider Sri Lanka’s request for completion of the fourth review in June 2018,” the IMF statement said.
It said the controversial measure, if implemented, would represent a major step towards completing energy pricing reforms in 2018, a key demand of the international lender.
Selling fuel below cost of production means tax payers of the country end up subsidizing all motorists, including the luxury limousines. Debts of the CPC also end up taking up bank credit that would otherwise be available for private sector economic activity.
The IMF noted that further efforts were needed to strengthen governance and mitigate fiscal risks from state-owned enterprises such as Sri Lankan Airlines, the Ceylon Electricity Board and the CPC.
Progress in implementing the Inland Revenue Act (IRA) and other revenue measures in the 2018 budget remains essential for meeting social goals and improving debt dynamics, it said.
It warned that the Central Bank of Sri Lanka should continue to remain vigilant in guarding against inflationary pressures, while continuing to build reserves and supporting greater exchange rate flexibility.
“Under the EFF-supported program, sustaining the reform momentum is critical to strengthen the resilience of the economy to shocks and promoting inclusive and strong growth.
“The authorities should push ahead with their Vision 2025 objectives, by further advancing fiscal consolidation through stronger fiscal rules and SOE governance; modernizing monetary and exchange rate frameworks; accelerating their inclusive growth reform agenda, through trade liberalization, climate, and gender budgeting; as well as better-targeted social protection programs.”