Sri Lanka Debt ‘unsustainable’, Need Adequate Assurances On Reforms: IMF On Debt Reconstruction
Posted on May 27th, 2022

Courtesy Outlook

The IMF-Sri Lanka discussions focused on fiscal sustainability, monetary policy, exchange rate regimes, financial sector stability and structural reforms.

The International Monetary Fund (IMF) has assessed Sri Lanka’s public debt as “unsustainable” and has said it requires “sufficient assurance” from that Sri Lanka will restore debt sustainability during the debt restructuring process, according to a media reort.

“Since Sri Lanka’s public debt is assessed as unsustainable, approval by the Executive Board of an IMF-supported programme for the country would require adequate assurances that debt sustainability will be restored,” said IMF, as per a report by EconomyNext website. 

The IMF team welcomed the appointment of financial and legal advisors to engage in a collaborative dialogue with their creditors and said it is an important step towards restoring public debt sustainability, said the IMF, according to the report. 

The report surfaced after the end of technical level negotiations between the Sri Lankan officials and IMF. 

Sri Lanka’s Prime Minister Ranil Wickremesinghe, who is also the finance minister, on Thursday said he would quickly prepare an economic reform programme and seek approval from the IMF.

He said, I have placed my special attention on this because of the present global situation, the war in Ukraine and global inflation. From what we can see, a number of countries may have to face economic problems like ours.”

On Thursday, Wickremesinghe met the chairmen and top management of all state and private banks in the country and inquired from them issues such as the dollar deficit and credit expansion as well as the amount of savings, as per media reports.

Sri Lanka is currently going through its worst economic crisis, which has triggered a political crisis as well. The country, which has nearly gone bankrupt, faces an acute foreign currency crisis that has resulted in foreign debt default. The government announced last month that it is suspending nearly $7 billion foreign debt repayment due for this year out of about $25 billion due through 2026. Sri Lanka’s total foreign debt stands at USD 51 billion.

The crisis has led to acute shortage of vehicular fuel, cooking gas, thermal fuel for power production resulting in long power cuts, and even essentils such as food and medicines. The country also witnessed widespread protests as people expressed against the ruling Rajapaksa brothers, which got violent and resulted in deaths. Mahinda Rajapaksa, the brother of President Gotabaya Rajapaksa, had to resign as prime minister. 

Protesters have occupied the entrance to Gotabaya’s office for nearly 50 days now, demanding his resignation as well.

New Prime Minister Wickremesinghe has promised to propose constitutional changes to curtail presidential powers, strengthen Parliament and resolve Sri Lanka’s economic difficulties.

The IMF on Thursday also said that the inflation had accelerated “driven by many factors, including the shortages of goods, fuel price increases, and currency depreciation”.

It said, “In this context, we are deeply concerned about the impact of the ongoing crisis on the people, particularly the poor and vulnerable groups.

“The IMF team held technical discussions on a comprehensive reform package to restore macroeconomic stability and debt sustainability. The team made good progress in assessing the economic situation and in identifying policy priorities to be taken going forward.”

The IMF comments also came as details of how Sri Lanka’s Monetary Board at the central bank and the Finance Ministry last year failed to address the debt sustainability issue despite the IMF in April 2020 advising Sri Lanka to go for debt restructuring.

It added that the discussions on Thursday “focused on restoring fiscal sustainability while protecting the vulnerable and poor; ensuring the credibility of the monetary policy and exchange rate regimes; preserving financial sector stability, and structural reforms to enhance growth and strengthen governance”.

“We expect that these discussions will help the authorities formulate their reform programmem,” said IMF.

Former Finance Minister Ali Sabry has said that badly timed tax cuts led to a reduction in the government revenue, reducing Sri Lanka’s ability to borrow.

Also releasing existing reserves to maintain the US dollar at a fixed rate against the local currency triggered the foreign currency crisis in the country already hit by the Covid-19 pandemic that severely reduced tourism revenue, which is one of the country’s economic lifelines.

(With PTI inputs)

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