IMF staff-level deal delayed till August – PM

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Prime Minister Ranil Wickremesinghe said in Parliament yesterday (5) that the staff-level agreement with the International Monetary Fund (IMF) will only be reached this August.

He said the criteria of debt sustainability set by the IMF should be met first.

“Unlike earlier, this time we entered the negotiations with the IMF as a bankrupt country that has suspended external debt payments. Therefore, we are not able to reach the staff-level agreement as easily as earlier. Therefore, we must first establish debt sustainability,” the Prime Minister said.

“According to the IMF recommendations, a detailed debt restructuring plan is currently being prepared by the financial and legal consulting firms Lazard and Clifford Chance to assess the possibilities of achieving debt sustainability by restructuring the debt.”

The Prime Minister emphasised that as soon as this report is received, it will be submitted to the IMF and it is possible to reach the staff-level agreement next month.

According to the PM’s statement, Sri Lanka’s economy is expected to shrink 4 to 5 per cent according to Central Bank and 6 to 7 per cent according to the IMF projection this year.

“Sri Lanka will take up to 2026 to come back to the old level,” he said.

Last Sunday, Finance Today published a detailed article on the progress of the IMF discussions. The Opposition had requested the Government to reveal the actual situation to the country based on the relevant article as well as the other Media about the recently concluded discussions with the IMF.

Accordingly, the Prime Minister yesterday made this special statement in Parliament regarding the progress of negotiations with the IMF.

According to government predictions, inflation will reach 60% this year and GDP may shrink to US$ 76 billion from US$ 94 billion.

“This is based on official exchange rates, but based on unofficial rates it may be worse,” the PM asserted.

According to the IMF, to properly assess a country’s debt sustainability, it is important to cover all types of debt that pose a risk to a country’s public finances.

The debt-to-GDP ratio has risen to 140%.

In accordance with the present discussions with the IMF, this high debt ratio needs to be reduced to a minimum of 100% from the present 140%, both short and medium term, for Sri Lanka to achieve the debt sustainability it needs. Also, over the next ten years (2023-2032) this figure will have to be reduced to 80%.

Financial adviser Lazard will use an IMF/World Bank Debt Sustainability Assessment (DSA) Model to assess the need for debt treatment. The key parameters of the treatment will be enshrined in a Memorandum of Understanding (MoU) between the Paris Club members such as Japan and EU with a minimum 75% of consent and non-Paris Club members that comprise both India and China. They have reportedly also been given several scenario analyses such as targeted growth and the required minimum size of debt reduction, composition of debt reduction on how to achieve Sri Lanka’s future debt sustainability.

By Ishara Gamage