IMF to determine Sri Lanka’s debt sustainability level

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One of the main tasks of the forthcoming discussions with the International Monetary Fund (IMF) will be to formulate a guideline for the restructuring of Sri Lanka’s debt, in a manner that will not affect the Sri Lankan financial system, a Central Bank Spokesman told Finance Today.

He said, local banks and other financial institutions had already invested about US$ 300 million in sovereign bonds and would make every effort to keep domestic (rupee) debt out of the restructuring process.

The IMF will hold the second round of discussions (policy) with Sri Lanka from 20-30 June in Colombo, Sri Lanka.

Sri Lanka Mission Chief Masahiro Nozaki  and Chief of the Debt Capital Markets Division of the IMF’s Monetary and Capital Markets Department (MCM) Peter Breuer (who  oversees a team analysing sovereign debt risks and providing advice on sovereign debt management and the development of local capital markets) will lead the IMF team in these upcoming discussions.

The Sri Lankan side will be led by Central Bank Governor, Dr. Nandalal Weerasinghe and Finance Secretary Mahinda Siriwardena.

“At the end of the discussion, Sri Lanka can most probably reach the staff-level agreement with the IMF,” the Central bank official said.

The IMF endorsement via a staff level agreement is a must factor for Sri Lanka to tap global funding sources including top donor agencies such as World Bank and ADB as well as bilateral funding with Japan .

According to the IMF, Sri Lanka’s debt is assessed as unsustainable. Approval of IMF financing, including through a Rapid Financing Instrument, would require adequate assurances that debt sustainability will be restored.

Therefore, both sides will jointly conduct a comprehensive debt sustainability analysis (DSA) to determine the required debt sustainability level.

“At the moment our debt to GDP is high as 120%. Therefore, we have to gradually reduce it to somewhere around 70-80% level to reach the IMF debt sustainability criteria,” he said.

As Sri Lanka is a member country of the IMF, they will provide balance of payments (BoP) assistance under the proposed economic adjustment programme. It will be subject to adequate security.

Accordingly, it will look at a number of factors that contribute to macroeconomic stability, including assisting Sri Lanka in overcoming its BoP, enabling repayments to the IMF, and preventing or mitigating spillovers to other countries.

Whether a country needs a debt restructuring depends on a number of factors, such as the adequacy of Debt sustainability analysis (DSA), the ability to adjust policy via fiscal and monetary policy reforms, and the availability of financing from all available sources (including IMF and other creditors).

Therefore, the DSA of the IMF plays an important role in deciding on what basis and on what percentage a debt restructuring should take place (within or outside the context of an adjustment programme supported by the IMF).

The IMF’s DSA recognises all the potential for debt service to institutional and private creditors, laying the groundwork for negotiations between the debtor and its creditors.

The IMF’s mission chief for Sri Lanka, Masahiro Nozaki earlier said the IMF is committed to assisting Sri Lanka, in line with its policies.

Both sides initiated the preliminary round of discussions at the IMF headquarters in April. Thereafter, both parties concluded the first round of virtual technical missions with the Sri Lankan authorities during May 9-24 on an economic programme that could be supported by an IMF lending arrangement.

Sri Lanka hopes for a Rapid Finance Instrument (RFI) facility as well as around US$ 3 billion Extended Fund Facility (EFF) from the IMF to overcome its balance of payment crisis.

By Ishara Gamage