Will IMF play Santa this Xmas for Sri Lanka 

According to Central Bank Governor Nandalal Weerasinghe, if Sri Lanka misses the December window, it plans to appear before the IMF Board in January 2023 and is optimistic that it would shortly receive assurance from bilateral creditors. 

The optimism is unfounded as according to financial analysts located in Washington; Sri Lanka is most likely to miss the deadline for obtaining the International Monetary Fund (IMF) loan next month. This means the country will have to wait until March 2023 to obtain an IMF loan worth $2.9 billion, to be paid in eight equal installments, when the December IMF deadline ends. 

An enormous macroeconomic catastrophe is currently affecting Sri Lanka. Unsustainable national debt levels are the result of years of fiscal irresponsibility and hazardous commercial borrowing. The banking system’s official reserves and net foreign assets have been exhausted as a result of the nation’s continuous debt servicing and import facilitation without access to international financial markets. China, one of the nation’s largest bilateral creditors, has shown little to no interest in renegotiating its debt, even as the likelihood of default increases.

In order to create an ad hoc creditor platform and provide financial guarantees before December 2022, Sri Lanka has been negotiating with bilateral creditors and groups like the Paris Club, urging India and China to join.

For the IMF Board to approve Sri Lanka, a number of prerequisite tasks must also be finished. Before experiencing the first drawdown, a Government often needs to stop money printing, resolve exchange policy disputes and crush internal investments in order to stabilise the external sector. Sri Lanka has already announced a budget for 2023 and boosted taxes and energy costs and is well on its way to meet the tight primary surplus targets set.

Despite rumours that the IMF will take a break from extensive operations in December for Christmas and New Year’s, they will continue working at least three days a week because they have a lot on their plate. Due to its soft peg, Sri Lanka has sought assistance from the IMF 16 times, but has avoided default since it lacks access to the markets for large-scale international debt borrowing. As the World Bank report claims, restrictions on foreign exchange liquidity have resulted in shortages of gasoline, food, medication, cooking gas and other inputs required for economic activity.

In April 2022, Sri Lanka announced the suspension of external debt service due to low reserves and named financial and legal consultants to assist with debt restructuring. Real incomes, food security and living standards have all suffered as a result of the unprecedentedly high inflation. Before the COVID-19 epidemic, there were already warning indicators of the economy’s deterioration. In the five years preceding the pandemic, growth and the fight against poverty had stalled. External imbalances had been exacerbated by a managed currency regime and are now paying the price years later.

In addition to these pre-existing fiscal imbalances, the 2019 tax cuts accelerated debt growth to unaffordable levels. In 2020, Sri Lanka lost access to the international financial markets as a result of credit rating downgrades. Sri Lanka requested assistance from the IMF as the crisis grew worse. In September 2022, the IMF and the Government came to a Staff-Level Agreement on a 48-month Extended Fund Facility program worth around $2.9 billion.

Before the IMF may offer financial assistance, governmental creditors must finance guarantees to restore debt sustainability and private creditors must make a good faith attempt to work with the Government to find a solution.