Monday, June 17, 2024

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IMF asks Sri Lanka to restore debt sustainability to gain a loan

The International Monetary Fund said discussions with Sri Lanka on a potential IMF loan program are at an early stage and any deal would require “adequate assurances” that the island country’s debts can be put on a sustainable path.

IMF Sri Lanka Mission Chief Masahiro Nozaki said that IMF Managing Director Kristalina Georgieva discussed lending options and policy plans with a Sri Lankan delegation on Tuesday.

The Finance Ministry said that negotiations between a delegation led by Finance Minister Ali Sabry and the IMF started in Washington on a positive note yesterday (Monday).

The IMF has noted the recent steps taken to increase the interest rates and calling for RfP’s for the appointment of international financial/legal advisors as good first steps towards a possible restructuring programme.

The Finance Minister had made a request for a Rapid Financing Instrument (RFI) to mitigate the current supply chain issues.

However, initially the IMF was of the view that it doesn’t meet their criteria.

The Finance Ministry said that India subsequently made representations on an RFI for Sri Lanka as well and the IMF may consider this request due to the unique circumstances.

The IMF also appears to be positive towards granting an Extended Fund Facility (EFF), the Finance Ministry said, adding that this can help stabilize things in the short term till long-term solutions kick in.

“An IMF-supported program should be designed to resolve Sri Lanka’s acute balance of payments problems and put the economy back on a sustainable growth path as early as possible,” Nozaki said.

The statement came after protests in response to shortages of fuel and other essentials turned deadly on Tuesday and Sri Lanka’s Finance Minister formally asked the Fund for a Rapid Financing Instrument loan for countries needing urgent balance-of-payments support.

Nozaki said the IMF is “very concerned about the current economic crisis in Sri Lanka and hardships suffered by the people, especially the poor and vulnerable.”

But he noted that IMF staff had determined last month in an annual economic review that Sri Lanka’s public debt was unsustainable, and the country needs to take steps to restore debt sustainability prior to any IMF lending, including the emergency Rapid Financing Instrument (RFI).

Such restoration of debt sustainability typically requires a restructuring or reprofiling of public debts, which in Sri Lanka’s case would require cooperation from China, one of its largest bilateral creditors.

The IMF used the low-conditionality RFI loans extensively to assist countries during the COVID-19 pandemic and has provided such loans to ease balance of payments problems after natural disasters, conflicts and commodity price shocks.

“These considerations would need to be examined for a potential RFI for Sri Lanka, once adequate assurances are obtained that debt sustainability will be resolved,” Nozaki said.

He added that the specific design of a Sri Lanka IMF loan, including program targets and conditionality, would be agreed through extensive discussions between the government and IMF staff.“The discussions are still at an early stage,” Nozaki said.

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