Sri Lanka’s emergency request for $200 million from the IMF under the Rapid Financing Instrument (RFI) has ignited debate among economists and policymakers about the financial prudence of the move. While the Government views the facility as a necessary tool to address urgent foreign exchange pressures following Cyclone Ditwah, independent analysts caution that the decision could prove costly in both the short and long term.
Verité Research, a prominent economic think tank, warned that RFI borrowing, when adjusted for exchange rate effects and Special Drawing Rights (SDR) valuations, could cost Sri Lanka more than 6% in dollar terms and over 11% in rupee terms. Time-based surcharges levied by the IMF further increase the long-term repayment burden. Dr. Nishan de Mel, Verité’s Executive Director, described the approach as potentially replicating past “knee-jerk” debt decisions, which contributed to Sri Lanka’s fiscal stress during the COVID-19 pandemic and the subsequent debt restructuring process.
The think tank emphasized that alternative funding mechanisms may offer significant savings. Domestic rupee bonds, currently yielding around 9% for three-year tenures, could be cheaper than the effective cost of an RFI loan. In parallel, local US dollar markets show potential, with Sri Lankans and diaspora investors willing to lend at rates near 5%. This market appetite suggests that targeted bond issuance for cyclone recovery could meet financing needs at lower interest costs while engaging local investors.
Verité also highlighted innovative strategies such as issuing ESG-linked International Sovereign Bonds backed by cyclone recovery KPIs and underwritten by multilateral development banks. Such instruments could attract socially responsible investors, reduce borrowing costs, and enhance transparency in disaster-related spending.
The think tank strongly recommended non-debt options, urging the Government to secure disaster recovery grants equivalent to 1% of GDP (approximately $1 billion) from multilateral and bilateral partners. Additionally, legal adjustments to temporarily lift spending caps under the Public Finance Management Act could enable effective recovery efforts without inflating debt.
Government officials remain confident that the RFI is justified under IMF rules. Finance and Planning Deputy Minister Dr. Anil Jayantha Fernando explained that the request targets urgent foreign exchange needs caused by Cyclone Ditwah while maintaining broader reform objectives under the IMF-supported framework. Originally expecting a $347 million disbursement under the Extended Fund Facility (EFF), the Government opted for the RFI to manage immediate pressures. IMF engagement will continue next month to revise the staff-level agreement in line with updated fiscal projections.
The decision underscores the tension between immediate disaster response and long-term fiscal sustainability. Analysts argue that careful, evaluation-driven choices could minimize future costs and reduce reliance on high-interest emergency borrowing. Sri Lanka’s experience illustrates the importance of strategic debt management, especially in a post-crisis recovery scenario where both urgency and cost-efficiency must be balanced.
