Sri Lanka has reached a staff-level agreement with the International Monetary Fund for a $2.9 billion loan. It would be a key step for the crisis-hit country to unlock more funds and restructure its debt.
The Fund’s Extended Facility agreement will support Sri Lanka’s programs to restore macroeconomic stability and debt sustainability. The IMF added that the 48-month program will be subject to approval by IMF management and the board.
“In this context, the authorities’ program, supported by the Fund, would aim to stabilize the economy. They will protect the livelihoods of the Sri Lankan people. And pave the way for economic recovery and the promotion of sustainable and inclusive growth,” the IMF said.
The South Asian nation is grappling with its worst economic crisis. It is since independence along with political turmoil that led to the formation of a new government. Dwindling foreign exchange reserves, crippling shortages of essential items. Asia’s fastest inflation has hit the $81 billion economy.
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THE KEY ELEMENTS OF THE PROGRAM ARE:
- Sri Lanka must implement major tax reforms. It includes personal income tax easing while expanding the corporate income tax base and VAT to achieve a primary surplus of 2.3% of GDP by 2024
- Introduce cost-recovery-based pricing for fuel and electricity to minimize tax risks from state-owned enterprises
- Mitigating the impact of the current crisis on the poor by increasing social spending
- Rebuild foreign exchange reserves by restoring a flexible, market-determined exchange rate
- Restoring price stability through data-driven monetary policy measures, fiscal consolidation, phasing out monetary financing
- Safeguard financial stability by ensuring a healthy and adequately capitalized banking system
- Reduce corruption vulnerabilities through improved fiscal transparency and public financial management
Ahead of the pact with the IMF, Sri Lanka raised the value-added tax to 15% from 12% on September 1. And revealed plans earlier this week to increase revenues to 15% of gross domestic product by 2025. It reduces the debt-to-GDP ratio to 100%, achieves economic growth of 5% in the medium term, and cools inflation that has accelerated above 60% to less than 10%.
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The CSE All Share index rose 1.9%, for the third day in a row. Sri Lanka’s 2030-dollar bond of 7.55% fell 0.5 cents to 31.5 cents on the dollar after gaining 2 cents on the dollar on Wednesday.
The island nation needs about $5 billion for essential imports over six months. Ranil Wickremesinghe said this in June when he was still prime minister. The country, which earlier this year defaulted on its foreign debt for the first time. The country is also looking to negotiate with global funds that hold about $12.6 billion of its bonds.
Debt Restructuring
Sri Lanka is turning to India, Japan, and China for bridge financing. The country would need an agreement between its official creditors before approaching bondholders, Wickremesinghe said.
“The need is more color in debt restructuring.” How or whether creditors will commit or not given the large proportion of private bondholders,” said Junyu Tan. Junyu Tan is an economist at Natixis SA in Singapore. “This is key to short-term debt sustainability” and sustained improvement in bond and currency markets, he said.
Sri Lanka’s foreign exchange reserves fell to $1.82 billion at the end of July, from $1.86 billion the previous month. The nation continued to turn to its dollar stack to buy fuel and other essentials. The amount includes a $1.5 billion exchange deal with China that Sri Lanka can only access if reserves increase to a certain level.
Sri Lanka is seeking up to $4 billion in aid from China, including triggering the swap. The bankrupt nation has received about $3.8 billion from neighboring India and is negotiating for more. India has urged the IMF to treat all of Sri Lanka’s creditors on a par.
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