Reforms for a Sustainable Recovery

March 2022
 Sri Lanka Has Experienced A Sharp Decline In Tax Revenue From
2019 Onwards
Tax Revenue as a % of GDP

12.9%
12.4% 12.5%
12.2% 12.0%

10.5% 11.6%
10.4% 10.1%

Based on 2019 data only 6 Countries in 8.1% 8.0%

the World have Tax to GDP Ratio less

than 8%

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 (E)

Source: Annual Reports, Ministry of Finance from 2013 – 2020 | 2022 Budget speech | World Bank Database© Verité Research 2022. Access given to participants only. Please
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 Erosion Of The Tax Base : A 33.5% Decline In Registered Taxpayers From 2019 To 2020

Total Registered Taxpayers* Key contributors to the decline

1,705,233
Replacement of PAYE with APIT Scheme
33.5%
As at 31.12.2019 1,149,883

42.2%
1,133,445
As at 31.12.2020 664,828

Increasing registration thresholds for VAT

As at 31.12.2019 28,914

71.8%
As at 31.12.2020 8,152

As at As at
Notes 31.12.2019 31.12.2020
1. *Total registered taxpayers are inclusive of both individual and corporate taxpayers
2. VAT – Value added Tax, PAYE - Pay-As-You Earn, APIT - Advanced Personal Income Tax, NBT – Nation Building Tax
Source: Annual Performance Report of the Inland Revenue Department - 2019 and 2020 © Verité Research 2022. Access given to participants only. Please
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 Due to the collapse in revenue Sri Lanka's Interest Cost Alone Accounted for 72% of
Government Revenue (2020)
80

70
Sri Lanka
Interest Cost to Revenue Ratio

60

50
Pakistan

40

Bahrain
30

20 Jordan Lebanon
United States
India Maldives
Seychelles Italy Japan
10 Mauritius Greece
Bhutan
Canada
0
France
80 100 120 140 160 180 200 220 240 260
Democratic
Republic
of Congo United Kingdom Debt to GDP Ratio
Source: World Bank | IMF database and IMF country specific reports | Certain Interest to revenue ratio are projections © Verité Research 2022. Access given to participants only. Please
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 Since April/May 2020 Sri Lanka’s credit ratings are at a historical low (“blacklisted”),
and the country is locked out of the international financial markets.

7.00 13

BB- 12
6.00
B+
Months of Imports

11

5.00 B 10

4.00
B- 9

8
3.00
CCC 7
2.00
6
Reserve Coverage
1.00
Sri Lanka Fitch Ratings 5

CC
- 4
Apr-16

Apr-17

Apr-18

Apr-19
Feb-17
Dec-15

Aug-20

Aug-21
Dec-16

Dec-18

Oct-20

Oct-21
Jun-16

Jun-17

Jun-18

Dec-19
Feb-16

Dec-17
Feb-18

Aug-18

Jun-19
Feb-19
Aug-16

Aug-17
Oct-16

Oct-18

Aug-19

Apr-20

Apr-21
Oct-19

Jun-21
Oct-17

Jun-20
Feb-20

Dec-20
Feb-21

Dec-21
Source: Fitch Ratings | CBSL Weekly Indicators
Note: December 2021 reserves excludes the Yuan 10 billion swap with the People’s Bank of China since it is not clear that this
can be used to settle US dollar denominated liabilities © Verité Research 2022. Access given to participants only. Please do not circulate.
 Sri Lanka's Annual Average Sovereign Foreign Debt Repayments Amount to USD 4.4 BN
from 2021 to 2025
Actual Foreign Debt Repayments (USD Millions) Projections
Average 2010 – 2018 Average 2021 – 2025
2,267 4,432
5,075
4,606
4,484 4,414 913
4,248
Principal 4,058 3,942
1390 1,220 1,006
Interest 1,105
3,243 1419 1,282
2,940
2,555
2,418 2,288 1309
2,229 849
2,032
838 1082 4,163
1,514 712 886
870 3215 3,264 3,408
1,182 3,142
2639 2,660
620
491 2091 1935
1517 1580 1402 1473
1161
692 893

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021* 2022* 2023* 2024* 2025*

* Projections from the 2020 Annual Report, Ministry of Finance

Source: Annual Report (Various years) Central Bank of Sri Lanka, 2020 Annual Report, Ministry of Finance © Verité Research 2022. Access given to participants only. Please do not circulate.
 Usable foreign reserves have dropped to less than one month,
the lowest level in Sri Lankan history (since 1950).
9,000 10.00

8,000 Gross Official Reserves (USD million) Reserve Coverage 9.00

Gross Official Reserves (US$ million)

8.00
7,000
7.00
6,000

Months of Imports
6.00
5,000
5.00
4,000
4.00
3,000
3.00
2,000
2.00

1,000 1.00

- -

1986

1996
1962
1964
1966
1968

1998
1982
1984

1988

1992
1994
1980

1990
1950

2002
2004
2006
2008

2012

2020
1952
1954
1956
1958
1960

1970
1972
1974
1976
1978

2000

2010

2014
2016
2018
Source: CBSL
Note: December 2021 reserves excludes the Yuan 10 billion swap with the People’s Bank of China since it is not clear that this
can be used to settle US dollar denominated liabilities © Verité Research 2022. Access given to participants only. Please do not circulate.
 Short Term Liability Maturities Exceed Reserves
Gross Official Reserves Vs. 12M outflows over time
12,000

10,000

8,000 Dec-21, 6,904

6,000

4,000

2,000 Gross Official Reserves as at end month (USD Mn)

12M Outflows as at end of month (USD Mn)

-
Jan-22, 791
Jul-17
Sep-17

Jul-18
Sep-18

Jul-19
Sep-19
Jan-17

Nov-17
Jan-18

Nov-18
Jan-19

Nov-19

Nov-20
May-17

May-18

May-19

Jan-20
Mar-20

Jul-21
Sep-21

Jan-22
Mar-17

Mar-18

Mar-19

May-20
Jul-20
Sep-20

Jan-21
Mar-21
May-21

Nov-21
Source: Central Bank of Sri Lanka
Note: December 2021 and January 2022 reserves excludes the Yuan 10 billion swap with the People’s Bank of China since it is not clear that this can
be used to settle US dollar denominated liabilities © Verité Research 2022. Access given to participants only. Please
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Depletion of foreign exchange has resulted in compression of
imports hurting economic activity

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Can the Recovery of Tourism Solve the Foreign Exchange Crisis?
Figures in LKR Billions

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 The Pandemic Was Not the Key Driver of Reserve Depletion
Figures in percentages and USD Millions
Change in Gross Official Reserves from 2019 - 2021

39% 41%
35% 33%
24%
+176,146
Sri Lanka

+13,465

+5,953
13% 12%

+20,955
10%

+425
5% 4%
-6,0631

India Bangladesh Bhutan2 Maldives Pakistan Nepal3 Malaysia Thailand Indonesia Philippines

Notes:
-79%
1) December 2021 reserves excludes the Yuan 10 billion swap with the People’s Bank of China since it is unclear if this swap can be used to settle US dollar
denominated liabilities
2) The comparison of reserves have been considered from end of 2019 till the latest available data online (November 2021)
3) Data for Nepal is a comparison between Mid December 2019 to Mid December 2021
Source: Central Bank of Sri Lanka | Central Banks of Relevant Countries
Road Ahead - 3 Scenarios to navigate the debt crisis
Disorderly Default 02
Third party bailout Government fails to make a
01 capital or coupon payment,
without prior negotiation

03

Debt Restructuring
(Orderly Default)
Creates liquidity and will
necessarily be accompanied
by an IMF programme.

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 IMFs Diagnosis: Probable Scope of a Programme
Warnings By IMF Recommendations By IMF
IMF confirms their assessment that SL debt is 1 Fiscal: “Ambitious fiscal consolidation”
1
unsustainable A Higher income tax and VAT rates
Inflation is projected to remain double-digit in the Minimizing tax exemptions and revenue administration
2 B
coming quarters reforms

3 Fiscal deficit is projected to remain large over 2022–26 C Expenditure rationalization, budget formulation and execution

International reserves would remain inadequate, due to Reform state-owned enterprises and adopt cost-recovery
4 D
persistent external debt service burden energy pricing

Significant contractions in imports and private credit Monetary policy: Tighter policy while phasing out the
5 2
growth expected central bank’s direct financing of the fiscal deficit
Exchange rate: A gradual return to a market-determined
Downside and Upside Risks 3
and flexible exchange rate
Additional downside risks: COVID-19 resurgence, rising Structural reforms: Increasing female labor force
A commodity prices, low agricultural production, potential 4
participation and reducing youth unemployment
deterioration in banks’ asset quality
Others: Phasing out of import restrictions and gradual
5
Upside: A faster-than-expected tourism recovery and unwinding of capital flow restrictions.
B
stronger-than-projected FDI inflows

Source: IMF Press Release: “IMF Executive Board Concludes 2021 Article IV Consultation with Sri Lanka”
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 Figures in LKR Billions

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