Colombo: When Sri Lankan officials arrive in Washington this week to meet with the International Monetary Fund amid economic and political crisis, the key question they will have to answer is how the country plans to manage its multibillion-dollar debt.
Sri Lanka is seeking up to $ 4 billion this year to help import essentials and pay creditors. To achieve any of these through the various IMF programs, the government must present a viable debt program. This is a typical request for help from the so-called last resort lender, even if the lack of food, fuel and medicine pushes the country towards a humanitarian crisis.
The downturn in the economic downturn – falling foreign exchange reserves and rising inflation – has sparked political unrest in Colombo. The local stock market announced that it will close this week amid uncertainty.
The prospect of bankruptcy is inevitable, as S&P Global acknowledged last week when it downgraded Sri Lanka’s credit rating and warned of another cut if the country loses coupon payments. Meanwhile, investors are trying to figure out how much they could recover from $ 12.6 billion in foreign bonds and whether there is even a profit.
The country’s dollar bond, maturing in July 2022, showed 5.2 cents higher on Monday to trade at 46 cents against the dollar, after falling sharply on Friday. Here are some IMF funding options, as talks are set to begin this week:
IMF members can access emergency loans, with a few conditions, through the Quick Credit Facility and the Lender Instant Financing Instrument. However, this payment is limited to 50 percent of a state’s one-year quota, which in the case of Sri Lanka is $ 395 million – or $ 289 million in special drawing rights, the IMF’s unit of account. The nation has said it will prioritize payments for food and fuel imports over debt service.
Even so, Colombo must take action to restructure its debt, which the IMF’s staff ruled last month was unsustainable.
“When the IMF finds that a country’s debt is unsustainable, the country must take steps to restore debt sustainability before the IMF borrows,” said Masahiro Nozaki, head of the IMF mission to Sri Lanka. “Thus, the approval of an IMF-supported program for Sri Lanka would require sufficient assurances that debt sustainability would be restored.”
Meeting these criteria could even include initial steps such as hiring advisers, which the government is seeking. The administration set a deadline for applications from financial and legal advisers, extending the initial date by one week. This makes Finance Minister Ali Sampri’s declared goal of securing emergency funds seem optimistic as early as a week after the start of negotiations.
With Sri Lanka having a $ 1 billion bond maturing in July and more repayments during 2022, it will likely need access to the IMF Stand-By Arrangement. Named its “labor body”, Sri Lanka will be eligible for a loan of up to 435 per cent of its quota – about $ 3.4 billion, with no repayment – for up to 36 months.
Payment can be made in advance if the need is urgent, but depends on the borrower’s agreement to terms such as specific revenue and deficit targets.
Central Bank Governor Nandalal Weerasinghe said last week that it was too early to assess the value of the loan Sri Lanka could receive from the IMF or to confirm the type of program the lender could agree on.
While he said an expanded capital facility – which allows for longer repayment periods – may be better suited to the country, it usually requires deeper structural reforms. Sri Lanka had approved this facility in 2016 and a stand-by agreement before it during the 2009 financial crisis.
Weerasinghe noted that Sri Lanka in the 2009 loan was approved for access to 400 percent of its quota.
“I do not understand why we can not get at least that amount,” he said. “Now the economic gap is much bigger.”