Milinda and Basil Working to Ink IMF Deal

By Ishara Gamage | Published: 2:10 AM Aug 25 2021
FT Milinda and Basil Working to Ink IMF Deal
By Ishara Gamage

The Government of Sri Lanka (GoSL) is now considering engaging with the International Monetary Fund (IMF) over the debt crisis that is throttling normal life and management of the Deltacharged COVID-19.

GoSL is threatening to take charge of the matter amid criticism that the officials are dragging their feet. Milinda Moragoda, scheduled to assume duties as High Commissioner to India this weekend, in a recent meeting with the Finance Minister, Basil Rajapaksa, has emphasised the importance of accelerating an IMF programme to avoid any possible further rating downgrades and socioeconomic uncertainties and increase local and foreign investor confidence to tap the global capital markets, a top adviser to the government revealed to Ceylon FT. A proposal, along those lines, has been delivered to the Minister of Finance, the Adviser continued. It is also said that both Milinda Moragoda and Basil Rajapaksa are hoping to use their US connections for such a programme as they worked closely during the presidential election. 

The Finance Minister is reputed to have made connections with the Biden Administration before his recent arrival in Sri Lanka. Although the current US Ambassador to Sri Lanka is said to have participated at those meetings, it is not known at what levels such meetings were conducted and how they concluded.

 It is also learnt that two members of the Monetary Board of the Central Bank of Sri Lanka (CBSL) and the majority of senior officials of the CBSL are already emphasising the importance of such an IMF led initiative to the relevant parties at an unofficial level. 

Secretary to the President Dr. P.B Jayasundera, CBSL Governor Prof. W.D Lakshman together with Minister for Capital Market Nivard Cabraal and Secretary to the Ministry of Finance S.R Attygalle are, however, strongly opposed to such a meeting ostensibly due to unpalatable conditions that are likely to be imposed by the IMF as preconditions. 

Nevertheless, many officials say the government is now gradually realising that the best and perhaps the only option is the IMF, given the seriousness of the current BoP crisis. Meanwhile, the government has already imposed temporary restrictions on current account related transactions thereby directly violating Articles of Agreement (Article VIII) with the IMF. 

At the same time, Sri Lanka's overall Debt to GDP ratio has exceeded the IMF targeted sustainable limit of 85%. The government also needs to move swiftly towards strong fiscal reforms that will increase state revenue. Critics say that if the government intends to enter into an IMF Agreement, then IMFfriendly policies should be put forth in the forthcoming budget. 

Sri Lanka is also hoping to obtain two swap facilities from the Reserve Bank of India, both amounting to a total of $1.4B. Last year, India imposed a condition on their first $400M swap facility for Sri Lanka provided under the SAARC umbrella. 

The condition was that for any renewal of the facility Sri Lanka participate in an IMF managed BoP programme. According to analysts that cover the Sri Lankan economy, following the recent settlement of the matured International Sovereign Bonds (ISB) with a face value of US$1 B as well as other smaller foreign debt and bill settlements, the reserves are now at a new low. 

Some place the reserves at under US$2.5 B while others at an even lower amount of US$2.3 B. These are reserve levels never experienced by Sri Lanka in modern times. Through his public economic policy think tank, Pathfinder Foundation, Milinda Moragoda has emphasised the importance of moving towards an IMF-led programme to manage these declining reserves. 

In its last economic policy public commentary, Pathfinder Foundation stated that the effect of the combination of decades of weak economic management and the unprecedented adverse impact of the pandemic means that Sri Lanka does not have any easy options. 

“Managing the crisis with as little pain as possible needs to be the priority” it stated. According to its observation, “Sri Lanka’s immediate priority is stabilising the economy by restoring fiscal sustainability in the medium term, primarily through revenue enhancement, and restoring debt sustainability by reprofiling debt servicing to a level which avoids severe compression of domestic absorption (investment plus consumption). 

“ “If the priority” it went on to say “is to limit the pain of the adjustment required to stabilise the economy and place it on a path of sustained growth and development, an arrangement with the IMF can facilitate a less painful blend of financing and adjustment.

 The Pathfinder Report concluded by saying “It can increase confidence among creditors and investors, which in turn would address the current dollar illiquidity by unlocking a more diverse range of bilateral, multilateral and marketbased financing sources.” Pain, it must be emphasised, cannot be avoided. “The challenge is to choose the least painful path” Pathfinder Foundation concluded then. That challenge remains and worsens with every passing day.

By Ishara Gamage | Published: 2:10 AM Aug 25 2021

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