#1Central Bank of Sri Lanka Ministry of Finance, Economic Stabilization & National Policies Investor Presentation - March 2023#2Disclaimer IMPORTANT: The attached presentation has been prepared solely for information purposes and on the basis of your acceptance of this disclaimer. This document and the information contained herein (the "Information"), do not contain all of the information that is material to a creditor of the Democratic Socialist Republic of Sri Lanka (the "Republic") and has no regard to the specific objectives, financial situation or particular needs of any recipient. By accessing and/or using this presentation, you agree to be bound by the following limitations and conditions and, in particular, will be taken to have represented, warranted and undertaken that you have read and agree to comply with the contents of this disclaimer. 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No representation or warranty, either express or implied, is made by the Republic or any of its officers or advisers, and no reliance should be placed on, the fairness, accuracy, completeness, correctness or reliability of the Information contained herein or as to reasonableness of any assumptions on which any of the same is based or the use of any of the same. It should not be regarded by recipients as a substitute for the exercise of their own judgment. The Republic accepts no responsibility for any losses howsoever arising, directly or indirectly, from this presentation or its contents. There may be material variances between estimated data set forth in this document and actual results, and between the data set forth in this presentation and corresponding data previously published by or on behalf of the Republic. Neither the Republic nor its advisors have any obligation to supplement or update the Information.#3Opening Remarks Dr. P. Nandalal Weerasinghe Governor of the Central Bank of Sri Lanka Mr. KM Mahinda Siriwardana Secretary to the Treasury and Ministry of Finance Any questions during this presentation may be submitted directly through the platform's Q&A chat box#4I. SRI LANKA'S IMF PROGRAM AND MACRO-FISCAL FRAMEWORK#5Sri Lanka's IMF program has been recently approved by the Board The IMF program provides a clear roadmap in terms of policy implementation, and will anchor economic recovery 5 key pillars of the new IMF program supported by EFF approved on 20th March 2023 1 Revenue-Based Fiscal Consolidation 2 3 4 Restore Price Restore Public Fiscal Structural Reforms Protect poor and vulnerable Debt Sustainability Stability and Rebuild External Buffers Safeguard Financial System Stability The IMF program will allow Sri Lanka to stabilize its economy, regain its growth potential and address its economic vulnerabilities Source: IMF 5 Reduce Corruption Vulnerabilities Growth- enhancing Reforms 3#6Sri Lanka has already demonstrated a strong commitment to reforms... The Authorities have successfully achieved all prior actions required to unlock the IMF financing 1 Implementation status Cabinet approval of the new Central Bank Act with amendments from the bill submitted to Parliament in November 2019 in consultation with IMF staff 2 Cabinet approval of Banking (Special Provisions) Act to strengthen key elements of the CBSL's crisis management powers 3 Hiring by the CBSL of an independent firm to conduct banking sector diagnostic exercise based on Terms of Reference and timeline established in consultation with IMF staff 4 Increase of policy interest rates by 100 basis points to ensure forward-looking real policy rates on a firmly upward path 5 Cabinet approval of revenue measures to support fiscal consolidation during 2023, in line with program parameters 6 Parliament approval of a revised 2022 budget that is in line with program parameters 7 Submission to Parliament of the 2023 Appropriation Bill that is in line with program parameters 8 Cabinet approval to automate monthly retail fuel price adjustment as prescribed by the 2018 fuel pricing formula to achieve cost recovery 9 Cabinet approval to automate semi-annual cost-recovery based electricity price adjustment All prior actions included in Sri Lanka's IMF Program have been implemented in a swift and orderly manner Sources: Ministry of Finance, Economic Stabilization and National Policies, Central Bank of Sri Lanka, IMF#70% Jan-20 20% 40% May-20 60% Sep-20 -19 p.p. since September 22 peak which have already contributed to relative improvements to the country's economic outlook Sri Lanka's economy has shown some encouraging stabilization signs, with year-on-year inflation slowing down and earnings from tourism rebounding to more standard levels CCPI Inflation is slowing down Headline inflation, in y-o-y change (%) Earnings from tourism are slowly returning to normal levels Yearly earning from tourism, in USDm Jan-21 May-21 Sep-21 Jan-22 May-22 Sep-22 Jan-23 Sources: Ministry of Finance, Economic Stabilization and National Policies, Central Bank of Sri Lanka 4,000 3,000 50.60% 2,000 3,682 1,000 ▸ Despite these signs of improvement, the overall situation remains fragile as the country is still burdened by high levels of public debt and low FX reserves 682 507 0 Average 2015-19 2020 2021 2022 +124% increase 1,136 5#8Sri Lanka has pledged to undertake further ambitious reforms as part of its IMF program Building on its recent achievements, the country envisages further extensive reforms¹ to extend the currently improving economic performance and secure long-term recovery Q3 and Q4-2023 • Revamping the VAT system by removing almost all product specific VAT exemptions • Submitting the Public Financial Management (PFM) Law to Parliament • Parliamentary approval for the full revision of the Banking Act Beginning of IMF Program 1st IMF review (Sept. 2023)² 2nd IMF review (Mar. 2024)² 3rd IMF review (Sept. 2024)² 4th IMF review (Mar. 2025)² Q2-2023 • Parliamentary approval of welfare benefit payment scheme (Enhanced Social Safety Nets) • Cabinet approval of a comprehensive strategy to restructure the balance sheets of key SOEs • Parliamentary approval of new anti-corruption legislation • Parliamentary approval of the new Central Banking Act 2024 • Introduction of reforms making the Minister of Power and Energy responsible for implementing cost-recovery based fuel and electricity price adjustments • Introduction of a property tax, a gift and an inheritance tax Other key policy commitments Improving efficiency of public investments, optimizing capital expenditure, improving borrowing of SOEs, increasing accounts transparency of SOES, liberalising trade regime, simplifying investment regime Sources: Ministry of Finance, Economic Stabilization and National Policies, Central Bank of Sri Lanka Note: (1) The reforms presented are selective; a complete list of the authorities' committed reforms can be found in the IMF staff report, (2) The IMF program timeline is tentative and reviews are subject to assessment of debt restructuring progress, which should be completed by the first review 6#9Such reforms will allow the economy to fully recover and secure a long-term growth in line with its potential The focus of the IMF program will be to lay the foundations of a restored macroeconomic stability and fiscal sustainability, that will allow Sri Lanka to unlock its full growth and trade potential Real Growth Trajectory Inflation¹ Path In %, YoY change In %, YoY change 2.6% 3.0% 3.1% 1.5% 46.4% 2022P 2023E 2024F 2025F 2026F 2027F (7.8%) (3.0%) Primary Balance In % of GDP 2022P 28.5% 8.7% 5.6% 5.2% 5.1% 2023E 2024F 2025F 2026F 2027F Current Account In % of GDP 2.3% 2.3% 2.3% 0.8% 2022P 2023E 2024F 2025F 2026F 2027F 2022E 2023E 2024F 2025F 2026F 2027F (3.8%) (0.7%) (1.3%) (1.4%) (1.4%) (1.4%) (1.6%) (1.9%) Sources: IMF (for estimates and forecasts), Ministry of Finance, Economic Stabilization and National Policies, Central Bank of Sri Lanka (for provisional) Note: (1) Average inflation figures#10II. SRI LANKA'S DSA AND NEED FOR DEBT TREATMENT#11Sri Lanka's Public Debt has grown rapidly and has reached unsustainable levels Despite the ambitious fiscal consolidation efforts, Sri Lanka's public debt trajectory is set to remain unsustainable in the absence of a comprehensive debt treatment The pre-restructuring scenario¹ results in an unsustainable debt trajectory, both in relation to debt stock and flow indicators In % of GDP², Public Sector Debt Stock (lhs), and CG GFNs (rhs) 160% 140% 128.1% 114.3% 120% 104.0% 100% 80% 60% 34.5% 31.0% 40% 26.1% 20% 50% 45% In the absence of debt treatment... 40% 1 114.7% 1 35% 30% 25% 19.8% 2 20% 2 15% 10% 5% 0% 0% 2020 2021 2022 2023 2024 2025 CG GFNs (rhs) 2027 Public Sector Debt Stock (lhs) 2026 2028 2029 2030 2031 2032 CG 2027-2032 Avg. GFN Sources: Ministry of Finance, Economic Stabilization and National Policies, Central Bank of Sri Lanka, IMF Notes: (1) The above DSA trajectory reflects a "pre-restructuring scenario" (i.e., a DSA scenario assuming the IMF program's adjustment path and foreseen multilateral/project loans financing and in which the remaining financing gap is financed with an illustrative 12% interest rate debt instrument), (2) CG Debt/GDP and CG GFN/GDP indicators are not presented on the same scale Public debt expected to remain excessively high GFNs expected to remain at unviable levels 9#12Sri Lanka is also facing a very significant external financing gap over the next years To ensure that it can credibly rebuild its buffers, Sri Lanka will have to cover its external financing gap over the program period, through new external funding and an external debt service relief 1 Calibrating the external financing gap... 2023-2027, in USDbn 23.6 14.2 Sizing the efforts in the 2023-2027 external debt service PPG contractual external debt service incl. full arrears clearance (USD 2.8bn), 2023- 2027, in USDbn 2 1.9 15.1 3.1 Existing debt 27.6 Excluded from the Multilateral creditors I 5.7 debt treatment Bilateral creditors 7.1 perimeter (29.5) Paris Club ("PC") 2.4 USD 7.6bn End-2022 GIR Current Account¹ Financial Account¹ Debt service Financing gap End-2027 GIR² due China 3.0 India 1.6 3.75 treatment will have to provide the necessary relief ■ Other IFIs financing 3.0 ■IMF financing 16.8 ... to be bridged through (i) USD 16.8bn in external debt service reduction and (ii) USD 6.75bn in new multilateral funding 2023-2027, in USDbn The external debt Other Non-Paris Club 0.2 Included in the Private creditors 14.8 debt treatment ISBs 12.1 CDB commercial loans 2.7 perimeter USD 21.9bn Others New debt³ 0.0 1.9 c. 75% debt service reduction Total 29.5 ■External debt relief Source: IMF Notes: (1) Non-Interest Current Account and Financial Account Flows (incl. Project Loans disbursements), (2) As per its IMF program, Sri Lanka has to rebuild its gross international reserves to about 100 percent of the ARA metric by end-2027 (which corresponds to 6.0 months import cover) (3) New FX debt assumed to be disbursed from IFIs and for Project Loans during 2023- 2027, (4) Debt service on Emergency Assistance Credit Lines (included under bilateral creditors) will be excluded from the debt treatment 10#131 The contemplated debt treatment should enable Sri Lanka to reach DSA targets reflected in the IMF framework The country's DSA targets were carefully calibrated to allow the country to restore debt sustainability, a key anchor of the country's recovery Debt stock target: 95% of GDP by 2032 What are the objectives of the targets? To ensure debt reduction and high probability of debt stabilization How are the targets calibrated by the IMF? The debt stock target is calibrated to ensure a high probability of debt stabilization, even under macro- fiscal shocks similar to those observed in the past 10 years 2 GFN target¹: avg. 13% of GDP To keep rollover risk manageable in 2027-32 3 FX debt service target¹: max 4.5% of GDP in 2027-32 To avoid post-program Balance of Payments pressures from FX debt service The GFN target is calibrated to ensure that the financing burden on the domestic banking sector is manageable under macro-fiscal and refinancing shocks (e.g., tightening of financing costs) similar to the ones observed in the past 10 years . FX debt service target is calibrated based on the country's ability to generate and sustain FX earnings (exports, remittances, terms of trade volatility), as well as the country's historical levels of FX borrowing ▸ Targets are set under the IMF's new SRDSF framework, and ensure public debt's return to sustainability territories Sources: IMF Note: (1) While the GFN and FX debt service targets only pertain to 2027-2032 period, the indicators both have to be on a downward trend between 2032 and 2035 11#14Amount² Sri Lanka is therefore requesting a significant effort from its foreign currency creditors. The effort required from private and bilateral creditors will contribute to meeting DSA targets and to bridging the external financing gap' - that will also be reduced by the financing provided by multilateral institutions Considered for debt treatment (USD 30.8bn, 68% of FX debt) Debt type Creditors Considered for exclusion of debt treatment perimeter (USD 14.7bn, 32% of FX debt) Amount² Central Government and Guaranteed SOEs Foreign Currency Debt (USD 45.5bn²) Debt type Rationale for exclusion Official bilateral creditors 34% of the Bilateral official loans Multilateral creditors Institutions with preferred creditor status and multilateral funding basis ECA-backed commercial loans USD 10.6bn Multilateral institutions will provide new financing during the program period USD 11.5bn FX treatment perimeter Emergency assistance credit lines • Loans extended during the crisis and aimed at addressing basic needs imports (food, fuel, essential medicine, ...) USD 0.8bn International bonds Private creditors 66% of the FX restructuring perimeter Commercial loans (Foreign Law) Commercial loans (Local Law) USD 20.3bn Bilateral Swap Lines Specific nature of swap lines (i.e., monetary policy instruments) USD 2.0bn Sri Lanka Development Bonds (Local Law) CPC and CEB FX Payables • Treated on an ad hoc basis (cleared over 10 years³) USD 0.3bn Notes: (1) Only Foreign Law Debts are accounted for in the external debt service reduction calculations, (2) As at end 2022 (3) Reflective of the latest IMF DSA assumption (with a 2.0% interest rate) 12#15Local currency creditors' participation in a domestic debt optimization will also help reaching the DSA targets The authorities are exploring options for a domestic debt operation aimed at liquidity relief while preserving financial stability to avoid further eroding Sri Lanka's repayment capacity Overview of Central Government Local Currency Debt: LKR 13,189bn (USD 36.3bn)4 Debt category Amount LKR 4,126bn Overview of T-Bills holders 1.1% 0.3% 17.5% Q Overview of T-Bonds holders 9.0% 44.5% T-Bills (USD 11.4bn) 18.7% 62.4% 42.7% 3.4% 0.1% 0.3% T-Bonds Other Loans5 LKR 8,722bn (USD 24.0bn) LKR 104bn (USD 0.3bn) CBSL advances6 LKR 236bn (USD 0.6bn) CBSL ■Deposit Taking Institutions¹ ■Non-Deposit Taking Institutions² ■ Other³ ■Non-residents' holdings Only T-Bills held by the CBSL will be considered for treatment to create some fiscal space ■Superannuation Funds Other Non-Deposit Taking Financial Institutions² ■Deposit Taking Institutions¹ Other³ ■Non-residents' holdings ■ CBSL A voluntary domestic debt optimization operation without coercion is envisaged Sri Lankan government and its advisors will initiate consultations with major T-Bonds holders to gauge options and constraints ▸ The DDO will help reduce the efforts required from external creditors to restore debt sustainability but taking into account financial stability objectives Notes: (1) Including Licensed Commercial Banks, Licensed Specialized Banks and Registered Finance Companies, (2) Including superannuation funds (if not specified elsewhere), corporations, insurance companies,, government institutions, funds and SOES, local individuals and others (e.g., societies, clubs, associations), (3) Including Treasury securities used for repurchase transaction allocations, (4) As at end 2022, (5) Commercial loans in local currency and banks' overdraft,(6) CBSL advances are reimbursed at a 0% interest rate 13#16III. CREDITOR ENGAGEMENT#17Update on engagement with official creditors What has been achieved Shared data and responded to queries received from all creditors ✓ Organized three official creditor meetings to share information related to the ongoing process and the IMF macro-framework ✓ Engaged further with official creditors bilaterally ✓ Secured IMF-compliant financing assurances from all official creditors Next steps with official creditors • Engage with official creditors through data sharing and Q&As to ensure that they have all the necessary information o Establish the required debt discussion channels (with the degree of coordination decided by official creditors) o Reach agreements that are in line with IMF DSA targets and comparability of treatment principle Ensure the legal implementation of agreements reached with all official creditors ▸ The achievement of the IMF Board Approval allows Sri Lanka to accelerate and intensify engagements with all categories of creditors 15#18Ongoing process with private creditors ISBS holders have organized around two committees ISBS account for a significant share of PPG FX commercial debt In % of total commercial FX denominated public debt, excluding ECA-backed debt and SOES' payables and including arrears, as at end-2022 Total: USD 20.3bn 34% 66% • ■Other private creditors ■ISBS • • ISBs international bondholders have formed an ad-hoc creditor committee The group is said to represent more than 55% of ISBS non-domestic holdings¹ A consortium of local private banks holding ISBS has formed another group The group has reported holdings in around USD 1.5bn across all series of ISBs (around 12% of outstanding ISBS) Next steps with private creditors Engage on a technical basis with bondholder committees' advisors and other private creditors to ensure further sharing of information and data, under NDAs Establish the required restructuring discussion channels with all private creditors and their advisors o Reach agreements with private creditors and their advisors that are (i) compliant with the IMF DSA targets and (ii) comparable across different creditor categories o Ensure the legal implementation of the agreements reached with all parties ▸ The achievement of the IMF Board Approval allows Sri Lanka to accelerate and intensify engagements with all categories of creditors Source: Central Bank of Sri Lanka Note: (1) Holdings estimation provided by two bondholder committees 16#19Key principles and update on the creditor engagement 1 2 3 A/A Transparency Good faith efforts for a collaborative process Fair and comparable treatment across creditors Consistency with IMF debt sustainability analysis ▸ SL authorities will engage with all their creditors in respect of the above principles In addition, the authorities commit not to resume debt service to any creditor (included in the debt treatment perimeter) unless a debt treatment agreement is reached, in line with IMF program and the comparability of treatment principle 17#20CREDITOR ENGAGEMENT IMF Targeted timeline for the Debt Restructuring Process ACTION PLAN March April May June July August Sept. 1. Key milestones with respect to the IMF Board Approval 1st Program Review 2. Engagement with domestic creditors Assessment of the domestic debt optimization operation Implementation phase 3. Engagement with external creditors (both official and private) Technical discussions with creditors Negotiation phase Implementation phase ▸ SL authorities envisage to finalize the domestic debt optimization operation by May 2023, and the external debt restructuring exercise by September 2023 18#21Contact Information • • The Sri Lankan Authorities thank all creditors and attendees of this presentation for their kind attention If creditors are interested in obtaining more information and engaging in discussions with the Government, please contact Sri Lanka's Financial Advisors Lazard and Legal Advisor Clifford Chance at the email addresses [email protected] and [email protected] for any request or other inquiry they may have Creditors wishing to contact the International Bondholder Committee can do so at the following e-mail address: [email protected] and WCSri Lanka [email protected] Creditors wishing to contact the Local Bondholder Committee can do so at the following e-mail address: [email protected] and bcsl@newstate partners.com This presentation will be posted on the Ministry of Finance, Economic Stabilization and National Policies' website 19