IMF team in Sri Lanka policy talks on program from August 24
ECONOMYNEXT – An International Monetary Fund mission will visit Sri Lanka from August 24 to 31 for talks on “financial reforms and policies” which would bring the country closer to a staff level agreement, the Washington based lender said.
“The objective is to make progress towards reaching a staff-level agreement on a prospective IMF Extended Fund Facility (EFF) arrangement in the near term,” an IMF statement said.
“Because Sri Lanka’s public debt is assessed as unsustainable, approval by the IMF Executive Board of the EFF program would require adequate assurances by Sri Lanka’s creditors that debt sustainability will be restored.”
Sri Lanka defaulted on its debt after going on a borrowing spree from 2015 as flexible inflation targeting, with a reserve collecting peg, backed up by output gap targeting (printing money to boost growth) triggering frequent forex shortages and currency collapses.
As forex shortages hit the country in 2015, 2016, 2018, and 2020 debt was accumulated at central government level through sovereign bonds and term loans as the country lost the ability to repay maturing debt in rupees (except in 2017 and 2019) and also at state-run Ceylon Petroleum Corporation.
Later the central bank also borrowed as the central government and the CPC lost the ability borrow, a phenomenon critics called Nick Leeson loans. The Nick Leeson loans may also end up at the government eventually, some analysts say.
An attempt was made to on another borrowing spree in 2022 in the name of ‘bridging finance’ but it failed. However India is still loaning money to the central bank, which also borrowed and has negative foreign assets.
The central bank however has raised rates to smash private credit and reduce outflows in a bid to restore the credibility of the peg. The IMF usually does not disburse money until the BOP has been turned, through rate hikes and a float.
In the current crisis however Sri Lanka also has to re-structure its foreign debt. The rupee debt however has almost halved in dollar terms and the economy is inflating. However fears of rupee debt re-structuring has led to elevated rates.
IMF Staff Statement on Sri Lanka
August 19, 2022
Washington, DC: IMF staff plans to visit Colombo during August 24-31 to continue discussions with the Sri Lankan authorities on economic and financial reforms and policies. The objective is to make progress towards reaching a staff-level agreement on a prospective IMF Extended Fund Facility (EFF) arrangement in the near term. Because Sri Lanka’s public debt is assessed as unsustainable, approval by the IMF Executive Board of the EFF program would require adequate assurances by Sri Lanka’s creditors that debt sustainability will be restored. IMF staff would also continue the engagement with other stakeholders during the visit. The team will be led by Mr. Peter Breuer and Mr. Masahiro Nozaki.
