Speaker 1  00:03
So I've been in this role for about eight months now, but Sri Lanka is very unique. It is not a conscious decision. Things are going the right direction, and we are very happy to see that. There have been reductions in exemptions. I think we should acknowledge this, and that's very important. Authorities lowered or eliminated certain VAT exemptions on many goods during the first two years of the programme.

Speaker 2  00:31
Evan Papa Georgiou is a deputy division chief in the Asia and Pacific Department of the IMF and the mission chief for Sri Lanka. He has served as mission chief for New Zealand and Vanuatu, deputy mission chief for Australia, and has also worked on Sweden and Denmark among other roles. Evan has extensive experience in monetary financial sector and financial market issues, gained over many years in the IMF's monetary and capital markets department, and as an emerging markets fixed income strategist at Goldman Sachs and Citigroup in New York and London, he helped lead the IMF's flagship Global Financial Stability Report and has authored numerous publications on macroeconomic and financial stability topics, including on asset purchases by emerging market central banks and the determinants of capital flows. Evan holds a PhD in operations research and financial engineering from Princeton University and an MA in financial mathematics from Columbia University, he joins us today on our latest episode of Advocata Conversations.

Murtaza Jafferjee  01:27
Evan Papu Georgio, welcome to the Advocata Conversation.

Speaker 1  01:31
Taza, it's good to be here. Thank you. Thank you for having

Murtaza Jafferjee  01:33
me. You look tired. Seems like a long trip for you.

Speaker 1  01:38
It was a long trip. It was 20, almost 20 days, but we make the most of it. We try to meet as many people as we can, and have as many discussions discussions as we can. This time around, we also got out of Colombo, which was a highlight for me and my team.

Murtaza Jafferjee  01:55
And what were some of the highlights of that trip?

Speaker 1  01:57
So we visited the central province as well as Uve Province, we we we wanted to meet some local government and to understand a little bit how the IMF policies and the programme go outside of Colombo. It is easy for us. It is easy for us to get a lot of information, but hearing from people on the ground, it was very more important, particularly for non-central government issues. They were. It was great to hear about the recovery and how it's going to hold in the rest of the country, but also the challenges that this has come to to to have come to pass. We also had a chance to meet with a smallholder farmer, a tea plantation farmer, a wonderful woman who is raising her child and making all her living from her farm, and we got to see firsthand the challenges that she faces with the high cost of electricity, you know the low wages, and you know periodic and uncertainty around many events.

Murtaza Jafferjee  03:10
Right. Perhaps some of these experiences we can discuss later with regard to some of the policies. But in order for our audience to connect a bit better with you, tell us a little bit about yourself, your background, and how you ended up being the mission director.

Speaker 1  03:25
Yeah, so I have been honoured to be the mission chief for Sri Lanka since March of 2025. So I've been in this role for about eight months now. I've been at a fund at the IMF for about 14 years now. Before the IMF, I was in in the private sector, and you know, Mortaza, I always give my kicks about having a a front row seat in understanding the issues more deeply and seeing how what can we do about this? So I've had prior experience in in my department in Asia Pacific department in other countries, but Sri Lanka is very unique, not least because of its programme with the IMF, the Extended Fund Facility, but also because Sri Lanka is quite dynamic in some ways and in in in how its growth forms and its how it deals with a lot of challenges. So for me, when the opportunity arise arose, that was something that I I couldn't I couldn't couldn't not consider.

Murtaza Jafferjee  04:35
Okay, and tell us a little bit about where you are originally from, what you studied, and why did you decide to study economics?

Speaker 1  04:42
I am originally from Greece, and I grew I grew up in Greece. I went to school in Greece. Greece, as you know, in some ways has gone through a deep economic crisis following the euro area crisis, or along with the euro area crisis. And you know I can help, but from time to time draw parallels or think about what my compatriots there went through, and that you know strikes differently, if you will, when it comes to the to the Sri Lankan programme. I lived in Greece. I went to school in Greece. I went my did my undergraduate degree, and then I went to the United States for for for further studies. I did my master's in financial mathematics at Columbia, and a PhD in financial engineering and operations research and financial engineering at Princeton. And then I had several other jobs in financial markets in New York and London. But what always spoke to me, you know, what I mentioned earlier about getting my kicks, it was really the policy work. I had an opportunity to find a way to go to the to to the fund. That was, you know, right after the global financial crisis. But, you know, things were still not by any stretch settled, and you saw the importance of good policies and the importance of maybe not applying the policies correctly. How did this propagate over time, and how did it become how the long-term consequences of choices that were made years before how this came to pass, right? So this gives you a good perspective for the importance of good economic, macroeconomic, and monetary policies, for example, on any country, but particularly in a programme country. It cannot be overstated.

Murtaza Jafferjee  06:34
What's interesting about your background is that you actually went from capital markets to the IMF, right? Many of your colleagues don't have that background. They're not really market guys. It is

Speaker 1  06:47
true. So the IMF is predominantly a traditional economist institution. I think we live and breathe macroeconomic and econometric modelling application, but I would say that especially since the global financial crisis and more recently, if you will, there has been a recognition in the institution that there is a need for a greater exposition to people with different backgrounds. So obviously, financial sector has been a little bit more long-standing. You know, I'd say 25 years now. The IMF itself has ventured into evaluating financial stability as a core part of its mandate, much like what we're doing here. We're discussing here. There's separate teams that do only financial stability analysis. So definitely, in that regard, there have been a lot more people joining from alternative careers. I am what you call a mid career hire at a fund where I did not come from the the well defined economist track, but that doesn't stop people from creating good opportunities and finding good applications of their knowledge into any sort of environment, including also the the Sri Lanka programme. So Sri Lanka has a lot of challenges. The more of the more diverse thought that you could introduce, I think in some ways better it

Murtaza Jafferjee  08:21
is. So we are in the 17th IMF programme. President has gone out of his way to tell the nation that it's going to be the last IMF programme. Tell us before we dig deep into some of your findings or to understand the progress. What are the basic parameters of this programme.

Speaker 1  08:43
The current programme that Sri Lanka has is a four-year extended fund facility. It's a 48 month. It started in on March 20, th 2023, so it will run out on march 19, 2027, and which means that by now we are a little bit or past the halfway point. The programme, as you very well know, Murtaza came on the back of a deep economic and humanitarian crisis that Sri Lanka went through, and in a way was trying to address those those those issues and address the reality on the ground at the time. The programme, broadly speaking, has five broad pillars, and those pillars have evolved, but are still the main the main pillars of the programme. Is the first one is to introduce revenue fiscal revenue consolidation, where within an attempt to restore fiscal sustainability, and and then that is a core part of restoring confidence and and return to to to stability. But alongside of that, it's very important to mention is the the the pillar to maintain also support for the poor and the vulnerable, and that goes hand in hand with the fiscal sustainability that we don't want to sacrifice one versus the other. The second pillar is to restore and maintain debt sustainability, which obviously has taken quite a lot of time to come through and to materialise with the debt restructuring, the the international sovereign bond restructuring, and bilateral creditor arrangements And agreements, which we think it's things are getting going much better, and we look forward to seeing more more progress. The third pillar of the programme is to to restore and maintain price and price stability, monetary stability, and with respect to inflation, for example, as well as to rebuild external buffers-that is, with respect to the level of international reserves and the ability of the country to withstand external shocks or to buffer against external shocks. The fourth pillar is to safeguard financial sector stability or financial system stability. You know, at the time, the beginning of the programme, there was concern about a big increase in non-performing loans in the banking system. That was very important to make sure to get ahead of this. Any crisis that is accompanied by any disruption to the banking system, to the financial system, becomes amplified, and thus was very important to get ahead of any issues that will arise from that, and final and least, but final last, but finally not least is governance, tackling corruption, you know, putting anti-corruption measures, improving governance, and and you know through that making long-lasting changes that would bring the economy back to long-term growth. So here we are now. I'm here on the occasion of the fifth review of the EFF, and we are seeing good progress. But I want to pause here because I know we will have a lot more discussion on this.

Murtaza Jafferjee  12:20
You just had a press conference today, and I think I've seen the press communique from the IMF. Tell us how we are doing.

Speaker 1  12:30
Look, Murtaza, things are going the right direction, and we are very happy to see that economic growth is certainly strong and undisputed. The first half of this year, the economy, real economic growth, real GDP grew by 4.8 percent year on year, following another strong outcome from last year. So this is very welcome, because alongside of that, you see many other benefits materialising on fiscal, on external, monetary policies is doing its its job. There is stability overall, and so this tailwind that is created by the better real outlook, in other words, the macroeconomy, helps provide the the the environment on which that you can do more right the country can deliver more the authorities can deliver more on their reforms, and to find a better environment for everybody to buy in at this progress so we are very happy to see it now of course growth is known to come and go, and policies have a very large part to play in this. We think this is the time to institute as many reforms as possible, because as growth is strong and any structural reforms may deter from that, this is the time. This is the cyclical time to do it. The word "cyclical" is also important for other reasons. The composition of growth and what comes out of this is also very important to understand. But you know, I know we can discuss this in many many ways. But so I'd rather not go there yet. But what I will highlight is that the resumption of growth is good. We welcome it. We go and see more, but at the same time, we want to see the continuation of the reforms, and this is the message we gave today at the press conference.

Murtaza Jafferjee  14:29
Now, you took over eight months ago. Your colleague Peter was there before. Your tenure coincides with the change in government, because although the current president came in in September. The general elections were held somewhere in November. So you basically came during that transition into a new administration. Were there any points of contention, change in philosophy, policy that the new government demanded from the IMF?

Speaker 1  14:59
That's a very easy answer for me to give because I was not here, but I will. I know what you mean, and I will. I will. I will. I will try to give you an answer. Obviously, since the new administration came in and the new president came in, we have seen continuity in the programme direction overall. So, standing where we are now, the programme has not really changed in any material way. The Sri Lankan authorities remain committed to the objectives and parameters of the broad programme, the pillars that I mentioned a little earlier, and so, including very importantly, including the fiscal debt targets as well as other parameters. So this is key because it safeguards all the the the hard won gains that were done since the beginning of the programme, and you know the strong reform agenda that was put forward. So it's key to maintain those gains and continue building on them. So this is important to put Sri Lanka on a path to to to long-term and sustainable recovery and strong recovery. Yeah. So obviously, the the continuous commitment to programme objectives and to programme deliverables is important because the policy continuity is also what reduces uncertainty and gives more confidence to the private sector to invest, foreign investors to come in, and for the and for for people in the population as a whole to feel that that there is there is a plan in in place and to enhance confidence. So, but what is important, and this is what we advise to the current government, as we would advise the previous government, any government, is to to to continue for the government to continue building on the efforts to continue building reserves, building building buffers through international reserves, through rebuilding their fiscal space. In other words, how much room they have to spend and how much room they have to to to maintain to rebuild with their fiscal consolidation, and this comes on the back of the macroeconomic stability that I mentioned, Improved revenue, better execution of spending, and a lot of issues relating to management of the economy, not least with SOEs and other entities.

Murtaza Jafferjee  17:13
If we can move on to some of the pillars of this MA programme, fiscal consolidation, revenue-based fiscal consolidation. There have been some changes to tax policy, but both in VAT and income tax, there remains to be exemptions. So there are moral issues on fairness, and there are also competitive distortionary effects in the case of VAT. When you exempt some items, it disrupts relative prices, and when you exempt certain people, like those working in export-oriented service industries, who pay 15% and others have to pay 36 because I always ask what's the difference between goods and services. As far as I'm concerned, they're all the same. And why do we continue with tax exemptions for port city? It's a property development. It's massively advantaged with its location. Why did you all not push back against removing all these exemptions because it's grossly unfair for many of us.

Speaker 1  18:25
Thank you, thank you. That's a good question, and in many ways, it goes a little bit to the to the design parameters of the programme, if you will. Let's start with what you just mentioned, right? Sri Lanka's fiscal consolidation is revenue driven, right, and that's important because revenue was very very low when the programme started, and traditionally Sri Lanka hasn't had much revenue. But even the revenue at the large level of single digits was abysmally low. So obviously that's no longer the issue, but it's very very important. So a core pillar then of the programme, as we were discussing from the beginning, is the restoration and the maintenance of the fiscal sustainability through revenue growth, and that's something we continue to look at. And then, so naturally, then the issue of exemptions comes in, and that's a very good point. Now, there have been reductions in exemptions, and I think we should acknowledge this, and that's very important. Authorities lowered or eliminated certain VAT exemptions on many goods during the first two years of the programme, and tax administration is also improving in many regards. There's a VAT compliance programme that is doing well and continues to show ongoing gains that we are very happy to see. There is the there is a quarterly publication of KPIs by IRD and ministry that we feel that do hold strong governance and good good performance. Deliverables, and also there is the upgrade of introducing and upgrading systems, in particular with digital systems that bring out good tangible effects efforts rather. So now, of course, it's very important. I cannot help but acknowledge exactly what you said that that tax collections have benefited from from good imports from you know especially vehicles now as you know, but there are still many exemptions that remain. You mentioned some tax exemptions in a port city and STP. This is something that we have looked carefully, including in this review, Murtaza. This is something that we have had long-standing engagement with the authorities, this is actually one of the structural benchmarks. Actually, two structural benchmarks: one for Port City, one for SDP, on exactly looking at what is their proper way of giving exemptions. So we have advocated for rationalising some of those exemptions. We're not against exemptions. Should be absolutely clear, they have a role to play, and in a well-designed system, many countries have them in a well-designed system. They have a good role to play, especially when it's near the most. But they shouldn't be the only way you you want to use them to to do policy. Yeah. So I think we we think very we think we think this is a very important part of the discussion. We think we want to see more. You mentioned VAT exemptions. I was very honoured to work as a mission chief to New Zealand, which has a world-class VAT system.

Murtaza Jafferjee  21:25
GST, yeah, they call it GST.

Speaker 1  21:27
Yes, correct. And then where the exemptions are exactly zero, nothing gets an exemption. There were some times where some people, some parliamentarians, would like to introduce some exemptions, and always their answer was no. And as many good reasons as there were to do this, there were even better reasons to not do that. I know in Sri Lanka this is not the case, and maybe we're a little bit far from this type of outcome. But I know also there is a little bit more of this understanding of of the exemptions don't always work well for their intended consequence because an exemption begets another exemption.

Murtaza Jafferjee  22:09
Incidentally, the architect of New Zealand's GST programme, Sir Roger Douglas, happened to interview him virtually. He's now in his 80s, and when I asked him, he said, "No, it's just grossly unfair to exempt anything.

Speaker 1  22:22
Absolutely, I couldn't agree more, and that's exactly what it comes down to in the end.

Murtaza Jafferjee  22:27
Now, talking about VAT, there's a lot of pushback from exporters against doing away with something called suspended VAT. Their argument is that you know our working capital requirements will go up significantly if the refunds are not paid in time, or that we may be induced to incentivize certain people to speed up incentives. What do you have to say about this?

Speaker 1  22:55
You're referring to the SVOT, obviously the S4DPO, and this is something that is actually in place right now as we speak, so Murtaza, any design of any system has to be drawn on on a well thought out of well thought out metrics and initiatives. The ESFAT system was there for a reason because there was no way for the VAT refunds to be intermediated quickly enough and to help those who were depending on it for their cash flow or for other reasons. We think it's time for that to be rolled back. There were several reasons why this is we we along with the authorities looked into the the the need for an ESFAD repeal and to be replaced with an with a refund system that would be administered with rules and well understood parameters that would go through within a predefined period of time, and under the law, that's a 45 day period. As we have spoken with IRDN, with the authorities, there has been a lot of work in preparation for the ESWA review, and the expectation is that this 45 day limit would actually be a much higher upper limit. In reality, some of these refunds could be done in much fewer, in much smaller period, many fewer days than that. And we look forward to seeing the outcome of this, depending, of course, on the risk rating of the exporter or the supplier. Now, authorities have done have taken a lot of steps in getting their IRD has increased has increased its capacity, has increased its ability to to to deal with these processes and become more effective and and more more more productive. We want to think that there is a good chance for this to succeed with least amount of disturbance in the system. And this I need to stress this in. No policy is worth it if it comes out and and its benefits somehow are outweighed by the downsides or the risks, and but this is not the case for Esfata Repeal. We we think and in our discussions with the with IRD ministry and the government we think that this is the case of a administration of an agency that will be able to deliver on its promises and its commitment. So, updating the IT systems, for example, putting in place enough officers to to deal with the refunds and to manage the refund workload has happened, and it's you know still some of that is already in place. We, as the IMF, have provided a lot of technical support, and we continue to support IRD. So this is something we're also paying very close attention. And then, in general, the authorities have implemented a VAT compliance improvement programme, and this goes hand in hand with this. They institute a new high net worth individuals unit, which has gone doing audits. These all go hand in hand with a change in mentality and a change in attitude from IRD and from the administration toward the private sector and society as a whole. So we want to see more on this, and we want to look forward to to the outcomes.

Murtaza Jafferjee  26:18
Two days ago, here in Advocata, we had a closed-door discussion, a roundtable discussion with Chatham House rules on taxpayer rights about tax administration, and the comments that we received were that there were lots of problems in tax administration, Unfair assessments. The appeals process was extremely long. You know, the overhead of the tax department to amount collected was very low, like point point 4% or lower, while the OECD average is about 1% I was surprised to find out that most of the tax assessors are actually their remuneration is below the tax-free threshold, so there are obviously issues with the tax administration. Did you take up with the government about institutional building measures of the IRT? You did say about technical assistance, but has this been the concern by policymakers about the capacity of the IRD? So,

Speaker 1  27:30
as with any policy, there has to be a due respect to the ability of each agency or ministry or department to see it through, and this is no different for IRD, you know. IRD, especially, I take note of what you mentioned about the the overhead. But one cannot stress enough that is perhaps one of the most important agencies and departments in in the whole administration in the entire country, because that's the lifeblood of any government. So when we're talking about fiscal revenue, the way the revenue is collected is primarily through IRD, customs, and others as well. But IRD has is a key agency in this regard. So the upgrades that are needed to take place, and the ones we have advocated for, and the ones that the government is is is putting in place alongside other development partners and ourselves as well are absolutely crucial, and this is something that we have we have paid more attention to. So look, I cannot speak to the exact numbers, but I assure you that this is something that we have looked at carefully,

Murtaza Jafferjee  28:41
and with regard to taxes, new come from Greece, which also had a chronic problem that the citizens didn't want to pay taxes. The concept of a social contract, a missing social contract. Now, when you look at the depth of Greece's crisis, and Greece has made a remarkable recovery, have attitude. of its citizens changed about taxes?

Speaker 1  29:07
So let me make a general comment first, because I think you're hitting on a very very important point, Mortaza. And I hope people, if it's one thing they can take away, it's that. If you can, if you want to shrink down the interview in one thing, that would be that. Public trust on how revenues are used is extremely important because it is what defines the legitimacy and the trust in the public system. So ultimately, tax compliance is not about enforcement; it's about legitimacy, and I think I hope this message comes through. And we have mentioned this many times, and and government and the author and the authorities as a whole understand this. In Sri Lanka, in as many countries as well, there may be a perception among some taxpayers that that. But revenues are misused, or the the or poorly allocated, perhaps this can lead to some hesitancy potentially into you know into the ability to be captured in the tax net or to be willing to be registered for let's say VAT or for personal income tax. So you know perhaps you could say this goes hand in hand with the tangible benefits you're receiving on this. You know, and you mentioned yes, indeed, my Greece, my my home country, we faced similar challenges at the time of the of the of the of the IMF programme. Of course, those issues were there well before the IMF was around, even when I was a little kid. So I think that it's very important that these are deeply entrenched attitudes, and the behaviour and and the the the scepticism, if you will, tends to become chronic. But what I will say is, over time, attitudes do change, particularly on the back of important reforms, governance in that regard comes in exactly at the right time. Much like Greece, governance reforms were prioritised and were were given more time to play out both during the programme and after the programme. And same thing here in Sri Lanka. I feel I feel that I have, you know, I've mentioned that I've been in this position since March, about eight months now. But even between the time that I arrived and now, the discussions we have with ordinary people and people when we travel outside the country, it does seem that there is change, even in the short period of time that I've been here. My team tells me, especially people who have been here longer-that this has taken much longer. This this this attitude has been there from the beginning of the programme as well. In other words, the social contract, right? The there is there is a real opportunity here to strengthen that that bond, that social contract between the state and everybody in society. So this means not just collecting taxes efficiently and effectively, and you know, you know, not letting runaway revenue form, but also communicate how these revenues are being used and holding those accountable. So we think this is very important. Programmes like Aspesuma, for example, which deliver targeted cash transfers, are a step in that direction, right? So we feel that this is also very important. So more broadly, I think government can build trust by being more open and by, by you know, being more accountable, and we see that already taking place.

Murtaza Jafferjee  32:35
One thing I can say as a Sri Lankan is that the tone is set at the top, and the personal behaviour of the president is laying the foundation for a renewed social contract.

Speaker 1  32:47
I fully agree.

Murtaza Jafferjee  32:48
Now you talked about Aswasuba, and that's a social transfer, cash-based social transfer programme. You all set a minimum threshold of spending. Last year, I don't think they achieved it. How is it looking this year?

Speaker 1  33:03
So you're right. So Aswasuma is very important. So in general, protecting the poor and the vulnerable has been a very key part of the programme, and as I said, it goes hand in hand with the pillar with the pillar of the programme. So at the time of the fourth review, we went to the board in June, July 1st, and we published a report the following day. If you look in there, we are very happy to report that the indicative target for spending towards the social safety net, particularly as per human, the empowered programme, has been met as of March of 2025. So this is something that we look very favourably. In fact, that was one of the all the previous, as you mentioned as well, Mortaza 2024 was not very good for those outturns. Not because the authorities did not did not because the authorities ignored it. Not because there was not efforts. Not because there was not a intention, but with a lot of these issues, there's a lot of capacity, capacity, and perhaps some some process that needs to be followed that was not properly followed. But meeting it in March makes us very makes us think that is definitely in the right direction. Now, of course, that needs to continue. This is not just a one-time thing. Those targets are there for a reason because they need to be. The reason we have the targets is because, as we said earlier, that there is a need for revenue-based fiscal consolidation. There should be a minimum amount of spending. Minimum should be above that, preferably, at which those who need it the most have access to it, and whether it's a programme like Aswa Suma or empowerment remains to be seen, or what it could be like in the future. So we don't want any social support to be sacrificed in the name of of fiscal consolidation, and so this is something very important. That we keep insisting on. Now, at the fifth review, where we are now, we will evaluate these indicative target on social spending for June and September because it's a quarterly assessment. So we look forward to seeing how this come out. Obviously, we had a lot of discussions with the authorities in the last few days on strengthening the targeting and the coverage and the adequacy of those systems, it is not easy, Mortaza, because again, it's not for lack of trying. But a lot of the systems tend to have a lot of inclusion and exclusion errors. This is something that we have emphasised the need to to create a better set of conditions for that to be to be addressed. Also, you know, to expedite the onboarding of the of the second round as well recipients is very important and it needs to needs to be completed as soon as possible, as well as launching the recertification of the first round applicants. This again is important because the inclusion exclusion errors is one of the issues that we heard the most about preventing people from people who well deserve it to to receive their their benefits.

Murtaza Jafferjee  36:08
On your trip over the weekend to the hill country, did you take this up with any of the people you met, whether they were recipients?

Speaker 1  36:16
That is a very good question. Exactly, that's exactly what we did. I mentioned earlier this smallholder tea plantation farmer. She met us during a tour of a plant. Do you remember

Murtaza Jafferjee  36:32
which area?

Speaker 1  36:33
It was in Nuera Elia.

Murtaza Jafferjee  36:35
Okay.

Speaker 1  36:35
Don't remember the name of the farm. I'm sorry. My my my probably on in East Em. My pronunciation. with Sinalla is only slowly coming up to coming up to speed, but she was holding her baby in her arms, and so thankfully we had one member of our team is from Sri Lanka, and she thankful did some very good quick translating, and she told us that you know she gave us a very good idea of what is life on the farm and the challenges that she faces and her family size and you know how how she goes about her day. So in a way, and also the way she owns her own land and the titling of her land, which is also very very important. Other issues for other farmers, but it is absolutely clear that the ability for those folks to make ends meet is very very tenuous, very difficult. And then the need for transfers there and the target the target support, I think it's clear. And we're not talking about support that will be open-ended forever, or something that would essentially make people rich. This is issues to help people in need, who are great in need. That particular person did not have access, did not receive as messuma. Again, not because of any particular issue. There's a lot of technical errors that tend to happen, so we don't point the finger at anybody, but we want the system to be better.

Murtaza Jafferjee  38:05
Your eligibility is based on deprivation, and there are 22 parameters based on six or seven dimensions. It'll be interesting to see why she's not getting in. Moving on, the other problem, or rather, Sri Lanka is setting record primary balance surpluses. In fact, August it was almost as high as 0.8 percent of GDP. Besides revenue, one problematic area is capital expenditure has collapsed. It's less than 50% of what's being budgeted. Is this a conscious decision of the government to hold back, or is it capacity to spend?

Speaker 1  38:51
It is not a conscious decision. The budget has repeatedly allocated the appropriate amount for capital expenditure, but capital spending, the capital spending budget has been untrusted chronically for a long time since 2023, since the beginning, where we are keeping very close track on these issues. So, so this this kind of pattern is not good, but it does draw on some issues and execution issues, particularly capacity issues, in particular. So this the immediate issue with this is that when this type of spending is actually very productive spending, and it's with the spending that determines long-term, medium, and long-term growth. So when you underspend there, unfortunately, it's not. Yes, it may look good in terms of having a good primary surplus, but it's not the kind of surplus you want to be necessarily having. Of course, you want to have a surplus, but you want to also spend where it's needed the most. That is not to say that you shouldn't. If you cannot spend there, you should not spend elsewhere either. But the issue is that it needs. There is a reason. Why this gets allocated in the in the in the Appropriations Act, right in the budget? So now some of these reasons, you know, you probably would sympathise as well. As you know, there is weaknesses in project project appraisal, in monitoring, in the evaluation, in how you pick projects to bring into the central budget, the central strategy, or not having a PIP also very important. So these are, you know, there. In general, there seems to be weak project readiness in some of these, you know, particular project modules. This is something we also identified during our technical assistance missions that took place in July a few months ago, the authorities requested a so-called PIMA, a public investment management assessment, which is a very thorough and broad investigation and analysis of what holds back public investment from all the way from the design to the execution and the budgeting and all the steps in between, and this is something that we have identified some some some bottlenecks and some key areas that need to be addressed and to be improved. So the capacity gaps that we mentioned are very important, but also the project preparedness and readiness and execution all need to go in the right the same in the same direction. So then we need to have the ability to once funds are available and now are available, the system needs to stop struggling to have a way to execute. And this is what we're trying to fix. What we're trying to advise the authorities to fix.

Murtaza Jafferjee  41:39
So that assessment you talked about is the report out.

Speaker 1  41:43
The report is with the authorities, but as with every TA report, every technical assistance report that the MF does, this is for the authorities' use. And but we encourage them to publish it, and we will do the same with this report as well. I think we will be a good read for everybody,

Murtaza Jafferjee  42:00
because my own experiences volunteering with government, and also in your governor's diagnostic, it's about the procurement. There are issues with public procurement, and it's a very complex process. And you know, the person who loses out on a tender, they can go to court and slow the whole process down, like what is going on with the airport. You know, there was two bidders. One person was not selected. They have gone to court, and delaying the whole process that you've probably gone through an airport number of times, and you can see that this has to be expedited. I agree. I agree.

Speaker 1  42:38
This is, and there is many issues in a, especially when the public coffer is involved, you do want to be careful. You do want to have good checks and and careful consideration of the risks and and and costs. But also, you cannot sacrifice that forever. You know, there should be progress, and this is what we're identifying.

Murtaza Jafferjee  43:00
If I can move towards economic growth, as you know, a few months ago the IMF held a conference in Sri Lanka where your first managing director Geeta Gopinath came, your Asia Pacific head Krishna Srinivasan came. Sri Lanka made a remarkably fast recovery. What do you think are the causes for this recovery, and is this more cyclical recovery, or has there been a structural transformation?

Speaker 1  43:33
Yeah, that is exactly. I think that's the best question to ask for any point, but particularly when you're having very strong growth. It's very easy to feel very confident, so you need to understand before you feel very confident what is driving it. So in this case, obviously, yes, absolutely, growth has been very strong. The first half of this of 2025 has registered of real GDP growth of 4.8 percent year on year, and each quarter has been roughly the same, so it's good growth. It doesn't seem to be a spike and then and then coming down. So that's very good, and we're very happy to see it. Now we we think obviously many components have contributed to this. When you look at the you know the the imports or the the consumption part of vehicles has shown as a big component of this the the presentation of GDP after you account for duties and taxes clearly shows that there was a very big pickup in the second quarter of this year, much more than the first quarter, which again coincides very well with the import and import of motor vehicles. Tourism has also done very well, and tourism is a good sector that can push the economy forward, and it can create some jobs and good conditions, and then of course you know some you know other spending, some some and some some building and some construction to a lesser extent. So now. Naturally comes the question: Then, how can this last, and what part of that? Why we have? Of course, we are very happy. We want to see it continue, but in order for us to be confident that it will continue, has to be a you know more of a structural shift. This is something that we still want to have a better look at, and we want to to understand its its you know its drivers from the get go, from where we see things right now, it seems like there is a big structural, a big, big cyclical component to this recovery. Not one particular reason, but obviously, when you have had a closed border for motor vehicles for five years, there is enough pent-up demand that has accumulated on the back of this, and so the big increase that we have seen in motor vehicles, to a large extent, express some of this pent-up demand that has been there for a while. We would love for this pace of imports to continue, but it's I think it's an unreasonable assumption to make for 2026, for example. That being said, we are we will publish our updated macroeconomic forecasts and expectations and projections from the completion of the fifth review. So that's something we're looking again exactly along these lines to to get a better idea. So the cyclical component, the recovery, we think will continue the rest of 2025 because all signs and point that direction, but it's very important that to stress this, and I don't want to do this and sound that I am I am I am raining down on any parade. But there are downside risks to this, and as well as upside risks, of course. Right, the re-escalation of tariffs or any particular concept of any disruption that could pose a significant downside risk to the economy. Now, on the other side as well, any sort of you know implementation of further structural reforms can upgrade the structural component of growth, give greater input to stocks investment. These are long-term important considerations. Let's hope, and we hope that this will take place, and we want to see that. We are working with administration to see that. But again, what are the messages that I want to give is that it is critical to sustain the reform momentum there. The time to do reforms is when growth is strong. Our previous managing director used to say, "The time to fix the roof is while the sun the sun is shining. This is what I want to leave you with.

Murtaza Jafferjee  47:26
When Geeta was here in her speech, one of the things she said was that look, there is a new world order. Thank you for mr. Donald Trump. You know the past model of globalisation, export-led economic growth that Southeast Asia and East Asia were able to exploit, perhaps may not be there. What's your view? I mean, should Sri Lanka yet focus on an export-led development model?

Speaker 1  47:58
Look, this is a good question. And had you asked me that 10 years ago, the answer would have been different. I bet you, if you ask me the same question 10 years from now, it may not be the same answer. In general, undertaking the structural reforms that, particularly with respect to governance, or streamlining business regulations, or breaking down barriers on on trade barriers, for example, or you know making it easier for investment to come in. These are all universally accepted and good good policies, right? Independent of the global winds, if you will, right, or for the global environment, trade environment. So I would say, focus on what you can control and and do more on this. Now, now, like look, look, advancing reforms creates an environment for Sri Lanka to to withstand external shocks.


Transcribed by https://otter.ai