Sri Lanka reached a staff-level agreement with the International Monetary Fund for a $2.9 billion loan, a key step for the bankrupt country to unlock more funding and restructure its debt.
(Bloomberg) — Sri Lanka reached a staff-level agreement with the International Monetary Fund for a $2.9 billion loan, a key step for the bankrupt country to unlock more funding and restructure its debt.
The Extended Fund Facility will support Sri Lanka’s program to restore macroeconomic stability and debt sustainability, the IMF said in a statement Thursday. The 48-month program will be subject to approval by IMF management and the board.
At a briefing in Colombo, IMF officials stressed the importance of moving swiftly on debt restructuring to obtain final loan approval. IMF’s senior mission chief Peter Breuer said a timeline for the loan disbursement would be difficult to ascertain. He also reinforced the need for urgent, short-term support for Sri Lanka to avert a humanitarian crisis.
Sri Lanka is working with financial and legal advisers on a debt restructuring strategy and intends to make a presentation to the creditors in the next few weeks, the finance ministry said in a separate statement. The meetings aim to provide updates on macroeconomic developments, main areas of the reform package agreed with the IMF and the next steps on debt restructuring, it said.
The South Asian nation is grappling with its worst economic crisis since independence alongside a political turmoil that led to the formation of a new government. Dwindling foreign-exchange reserves, crippling shortages of essential items and Asia’s fastest inflation have hammered the $81 billion economy.
What Bloomberg Economics Says…
Sri Lanka’s deal with the International Monetary Fund should come as a relief for the crisis-hit country, but it may take time for any aid to arrive. How quickly depends on whether Sri Lanka can provide assurances it can meet the IMF’s difficult belt-tightening targets and also reach agreements with its lenders.
–Ankur Shukla, India economist
For the full note, click here
The island nation needs about $5 billion for essential imports to tide it over for six months, President Ranil Wickremesinghe said in June when he was still the prime minister. The country, which earlier this year defaulted on its overseas debt for the first time, is also looking to negotiate with global funds that hold about $12.6 billion of its bonds.
“More color is needed on debt restructuring, especially how or whether or not creditors will engage given the large share of private bondholders,” said Junyu Tan, an economist at Natixis SA in Singapore. “This is key to debt sustainability in the near term” and a sustained improvement in the bond and foreign-exchange markets, he said.
Ahead of the IMF pact, Sri Lanka increased the value-added tax to 15% from 12% starting Sept. 1 and unveiled plans earlier this week to boost revenue to 15% of gross domestic product by 2025, reduce debt-to-GDP ratio to 100%, hit a 5% economic growth over the medium term and cool inflation that has accelerated above 60% to below 10%.
The CSE All Share index jumped 2%, up for a third straight day, while Sri Lanka’s 7.55% 2030 dollar bond dropped 0.7 cents to 31.3 cents on the dollar after gaining 2 cents on the dollar on Wednesday.
Bridge Financing
Apart from the IMF, Sri Lanka is tapping India, Japan and China for bridge financing. The country would need an agreement among its official creditors before it approaches the bond holders, Wickremesinghe had said.
Sri Lanka’s foreign exchange reserves dropped to $1.82 billion at end July, from $1.86 billion a month earlier. The amount includes a $1.5 billion swap arrangement with China that Sri Lanka can only access if overall reserves rise to a certain level.
The South Asian nation is seeking as much as $4 billion in aid from China, including the activation of the swap. It has received about $3.8 billion from neighbor India and is negotiating for more. India has urged the IMF to treat all of Sri Lanka’s creditors on par.
(Corrects with IMF’s revised date for meeting primary surplus target in table)
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