IMF Team to visit Sri Lanka next week

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An International Monetary Fund (IMF) mission team led by Messrs. Peter Breuer and Masahiro Nozaki will commence their second visit to Colombo on 23 August, to finalise Sri Lanka’s Debt Sustainability Analysis (DSA)  programme, a top government official told Finance Today.

The spokesman said that at the end of these discussions, both sides will probably work to reach a staff level agreement (SLA).

The financial adviser of Sri Lanka’s debt restructuring process, the M/s. Lazard, France, has already given a report containing proposals on how to achieve debt sustainability in Sri Lanka according to the criteria of the IMF, he said.

However, it is stated that Sri Lanka has not yet reached a final agreement regarding the proposals contained in the relevant Lazard report.

Reports say that Sri Lanka’s economic growth trends, primary account surplus, inflation, etc., will be evaluated further, based on realistic macro-economic scenarios.

Sri Lanka is currently fulfilling the preconditions for achieving debt sustainability. In the future, many measures including the privatisation of state assets are to be taken under this.

 During the upcoming discussions, Lazard is going to hold further discussions  relating to Sri Lanka’s  debt dynamics with the IMF, the Ministry of Finance (MoF) , the Central Bank of Sri Lanka (CBSL) and all parties officially involved in the debt restructuring programme of Sri Lanka.

In order to reach a SLA with the IMF, it is necessary that Sri Lanka presents a comprehensive economic adjustment programme to them with the consent of the Government.

Also decisive is the debt restructuring exercise underway by the Lazard Group that will help establish the level of debt sustainability, a key variable with the IMF.

‘The IMF has provided Lazard with several scenarios in the preparation of a comprehensive DSA for Sri Lanka on 20 June 2022. After analysing these scenarios extensively Lazard is now recommend the optimum method to achieve debt sustainability along with the opinion of Legal Advisor, M/s. Clifford Chance LLP,’ officials said.

A major criterion will be to reduce Public Debt to GDP ratio, which is currently close to 140 per cent, to a level below 100 per cent on a medium to long-term basis within a time frame of 10 years (2023-2032).

The Sri Lankan delegation hopes to submit the comprehensive economic adjustment programme prepared by Sri Lanka to the IMF next month based on the Lazard report.

If it is possible to obtain the approval of the IMF, the opportunity will be provided to reach a SLA with the IMF early next month.

Based on the SLA, Lazard will be given the opportunity to officially start negotiations with external creditors for debt restructuring agreements.

The SLA will state that it is essential to obtain the full consent of bilateral creditors within the Paris Club such as Japan, as well as the full consent of non-Paris Club bilateral creditors like China and India. In the absence of such mandatory language, it is widely held that approval of the Executive Board of the IMF to implement an Extended Fund Facility (EFF) programme for Sri Lanka will be difficult. When queried, a spokesperson of the CBSL stated that only a “sufficient assurance of financing” is required for Executive Board approval.

Meanwhile, global ratings agency S&P Global on Monday slashed its rating on Sri Lankan bonds to ‘D’, representing default, following missed interest and principal payments.

The IMF team held technical discussions on a comprehensive reform package to re-establish macroeconomic and debt sustainability. The discussions were focused on,

  • Restoring fiscal sustainability while protecting the vulnerable and poor.
  • Ensuring credibility of the monetary policy
  • Exchange rate regime
  • Preserving financial sector stability
  • Structural reforms to enhance growth
  • Strengthen governance

By Ishara Gamage