IMF says Sri Lanka deal moves forward and needs guarantees from creditors. The International Monetary Fund says, “Significant progress” has been made toward an aid program for Sri Lanka. It requires restoring debt sustainability and financing guarantees from the country’s creditors. It also requires “far-reaching” fiscal reforms.
“Monetary, fiscal and other actions by the authorities since early April were the first important steps to address the crisis”. The IMF said in a statement on Thursday after the June 20-30 meetings in Colombo. “Discussions will continue to reach a staff-level agreement. It will be an EFF agreement in the short term,” he said. That referring to the lender’s Extended Fund Facility.
The Washington-based lender has said Sri Lanka needs to reduce existing debt. The dept. is to “sustainable” levels before it can receive aid. On Thursday, it said the executive board’s approval would “require adequate financing guarantees. The guarantees, from Sri Lanka’s creditors, that debt sustainability restores.”
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Sri Lanka is experiencing its worst economic crisis. Siri Lanka has been in crisis since independence and defaulted on its international debt. Siri Lanka needs at least $6 billion in the coming months to stabilize the finances of the nation. It was devastated by years of political blunders and the Covid-19 pandemic. With authorities now turning to money printing to pay government salaries. The economy runs the risk of runaway inflation amid shortages of everything from fuel to medicine.
On Monday, Sri Lanka urged residents to stay home until July 10 to conserve fuel amid difficulties in importing. It is as suppliers insist on settling past debts. Sri Lanka has asked the IMF for quick help and a longer-term loan. Any approval of the country’s debt plan would signal to other creditors that the nation is doing enough to qualify for fresh funds.
Prime Minister Ranil Wickremesinghe, who also oversees the Finance Ministry. He told Bloomberg News last month that the multilateral lender had sought a primary surplus of 2% of gross domestic product by 2025. While, Sri Lanka was more likely to only break even or post a 1% surplus by then.
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His government has taken steps to raise taxes, put state assets up for sale, and has pledged to cut spending down to “bare bones.”
Sri Lanka hired Lazard Ltd. and Clifford Chance LLP in May to serve as financial and legal advisors on debt restructuring. It would after the nation fell into default with a 30-day grace period due after interest payments were lost on some sovereign bonds.
The country needs to agree on a baseline for a debt sustainability analysis. It determines what kind of offer it makes in separate restructuring talks with bondholders. It includes a group of the country’s largest creditors: Pacific Investment Management Co., T. Rowe Price Group Inc., and BlackRock Inc.
Wickremesinghe said last week that Sri Lanka also plans to hold a credit aid conference with partner nations including India, Japan, and China to secure new funding.
Meanwhile, Hamilton Reserve Bank Ltd., which owns more than $250 million of Sri Lanka’s 5.875% International Sovereign Bonds due July 25, last week filed a lawsuit in a New York federal court seeking full payment of principal and interest.
The IMF said Sri Lanka must also address:
- Rising inflation levels and severe balance of payments pressures
- Vulnerabilities to corruption and undertaking reforms that foster growth
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