Tuesday, January 31, 2023

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IMF asks Govt to give an assurance of public debt sustainability

The International Monetary Fund  has requested the government to make a commitment on foreign and domestic debt sustainability expressing the need of “adequate assurances” from Sri Lanka’s creditors for a new program as it prepares a visit to Colombo later this month.

The aim of the visit is to make progress on a staff-level agreement for an aid package “in the near term,” to help the island nation weather a severe economic crisis, the IMF said on Friday. Staff from the global lender will be in Colombo from August 24 to 31, the IMF said.

“Because Sri Lanka’s public debt is assessed as unsustainable, approval by the IMF Executive Board of the Extended Fund Facility program would require adequate assurances by Sri Lanka’s creditors that debt sustainability will be restored,” the IMF said.

President Ranil Wickreamsinghe also highlighted the need of domestic debt restrucring as domestic borrowings have increased in massive prpotions recently.

At least two recent public meetings President Ranil Wickremasinghe categorically stated that domestic debt stock was serious and it needs to be restructured as well and that external consultants were looking into it.

He told the Organisation of Professional Associations (OPA) annual conference and awards ceremony held in Colombo this week that Sri Lanka’s International Sovereign Bond (ISB) holders may exert pressure on the government to restructure the domestic debt.

He noted that they alone may not be keen to accept a steep haircut under a debt sustainability plan, which is a prerequisite to secure an International Monetary Fund (IMF) bailout.

Total outstanding domestic debt was Rs. 12 trillion as at the end of March 2022 while the gross domestic borrowings of the Government surpassed Rs 1.6 trillion in the first four months of 2022, Finance Ministry data shows.

Around 60 percent of the domestic borrowing (over Rs. 1 trillion) was raised from Treasury bonds, 31 percent  (Rs. 518.2 billion) from Treasury bills, and 4.4 percent  (Rs 73.8 billion) through provisional advances from the Central Bank, and Rs 65.6 billion was raised from Sri Lanka development bonds.

However domestic debt has already received upfront hair cut via over 60 percent inflation and inclusion debt restructure could cause financial instability, several economic experts warned.

Contradicting the President’s view of possible restructuring of massive domestic debt, Dr Weerasinghe point-blankly ruled out even such an eventuality adding that there was no need to restructure domestic debt at present as the monetary authority has taken measures towards debt sustainability.

Dr Weerasinghe disclosed that still there was no request for domestic debt restructuring and the Central Bank is fully convinced that it would be able to make it sustainable.

“The government position is to re-structure external debt,” Dr Weerasinghe said adding that the banks liquidity position will be affected by domestic debt restructuring.

Reuters reported on Thursday that Sri Lanka will ask Japan to invite the Indian Ocean island’s main creditor nations, including China and India, to talks on bilateral debt restructuring.

The loan package being negotiated with the IMF is for between $2 billion and $3 billion according to President Ranil Wickremesinghe, who said he would present an interim budget in September focusing on fiscal consolidation measures agreed with the IMF.

The country of 22 million people is facing its most severe financial crisis since independence from Britain in 1948, resulting from the combined impact of the COVID-19 pandemic and economic mismanagement.

Ordinary Sri Lankans have been battling shortages for months amid crippling inflation and a devalued currency, stoking unprecedented mass protests. Thousands of people stormed the colonial-era presidential residence in Colombo, the commercial capital, in early July.

Sri Lanka’s total bilateral debt earlier this year was estimated at $6.2 billion as of the end of 2020 by the IMF. It also has $14 billion of international sovereign bond debt.

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