Sri Lanka seeks IMF-backed program to manage debt repayment
Amid the current economic crisis, Sri Lanka is seeking help from the International Monetary Fund (IMF) to restructure its unsustainable debt with Finance Minister Basil Rajapaksa visiting Washington next month.
President Gotabaya Rajapaksa, in a national address on Wednesday, said he had given the green light to an IMF program after meeting with senior officials of the lender in Colombo, The Island reported.
“The (Sri Lankan) authorities have also indicated that they are actively considering an IMF-supported program,” IMF spokesman Gerry Rice said on Friday, adding that “we will discuss with the authorities how best to helping Sri Lanka move forward, including during the Finance Minister’s visit to Washington in April.
The IMF analyzed Sri Lanka’s economy in a staff report that was submitted to the money lending agency’s board.
The full report has not been made public, but the main conclusions, including that the debt is unsustainable, are now known.
The report also warned that the Sri Lankan economy could implode unless steps are taken to curb currency instability.
Recently, Sri Lanka has seen its national currency devalue significantly against major international currencies, in addition to crippling fuel and gas shortages and daily power cuts, with the currency reaching an exchange rate of around 270-290 SLR against a dollar on Friday.
An IMF program typically involves a strict monetary reserve program to stop inflation and block the validation of domestic prices when the currency weakens, The Island added.
Tax increases and spending cuts will reduce the budget deficit and domestic credit, keeping the corrective interest rate low. Private citizens of Sri Lanka are net savers and unable to trigger monetary pressure.
A foreign exchange reserve target is also set and reserves for imports are generally discouraged (sometimes so-called intervention in disorderly market conditions is allowed, which however can undermine the currency unless unsterilized).
Debt restructuring will also reduce the corrective interest rate and the need to immediately deploy more savings for debt repayment and leave room for a reasonable growth path.
India provided more than $500 million in currency swaps to bolster Sri Lanka’s foreign exchange reserves, bringing the total to $900 million. India has also extended the repayment deadline for Sri Lanka’s $500 million debt in the Asian arbitration.
Most recently, on Thursday, Sri Lanka signed a $1 billion line of credit with India for the purchase of food, medicine and other essential items during the two-day visit of the Sri Lankan Minister. of Finance, Basil Rajapaksha, in India.