The International Monetary Fund (IMF) has reached a staff-level agreement with crisis-hit Sri Lanka, in a first step before extending a $2.9 billion loan package that the Fund has made contingent on assurances from the island nation’s creditors.
“IMF staff and the Sri Lankan authorities have reached a staff-level agreement to support Sri Lanka’s economic policies with a 48-month arrangement under the Extended Fund Facility (EFF) of about $2.9 billion,” a visiting IMF team said on Thursday.
The announcement comes even as Sri Lanka endures an agonising economic downturn that has left scores of families starving, as they cannot afford basic food items. Headline inflation soared to 64.3% in August 2022, while food inflation rose to 93.7%. As the crisis worsened this year, at least six million people, or about 30% of Sri Lanka’s population, became food insecure, according to the World Food Programme.
President Ranil Wickremesinghe termed the staff-level agreement “an important step in the history of Sri Lanka”. “The beginning will be difficult, but we know as we go on that we can make more progresses,” he said in a statement.
The objectives of the new programme — Sri Lanka’s 17th with the Fund — are “to restore macroeconomic stability and debt sustainability, while safeguarding financial stability, protecting the vulnerable, and stepping up structural reforms to address corruption vulnerabilities and unlock Sri Lanka’s growth potential,” the IMF said.
However, the international financial institution has laid out expectations that Sri Lanka must meet, before the IMF management and Executive Board can approve the programme.
“Prior actions” on Sri Lanka’s part include raising fiscal revenue through a “more progressive” income tax regime, rebuilding foreign reserves, and increasing social spending. Significantly, Sri Lanka, which opted for a pre-emptive sovereign default on its $51 billion foreign debt in April, must work to obtain debt relief from its creditors and additional financing from multilateral partners “to help ensure debt sustainability and close financing gaps,” the Fund said in its statement. It added, “Financing assurances to restore debt sustainability from Sri Lanka’s official creditors and making a good faith effort to reach a collaborative agreement with private creditors are crucial before the IMF can provide financial support to Sri Lanka.”
Sri Lanka’s chief creditors are International Sovereign Bond holders, to whom the island owes the largest chunk of its foreign debt; multilateral agencies, and bilateral lenders — mainly China, Japan and India.
Amid speculation on whether China, Sri Lanka’s top bilateral lender, would come on board as Colombo attempts to restructure its debt, members of the visiting IMF delegation, Peter Breuer and Masahiro Nozaki, told a media conference that it was “in the interest of creditors” to collaborate among themselves and cooperate with Sri Lanka to expedite economic recovery.
In a recent interview to Nikkei Asia, President Wickremesinghe said Sri Lanka had conveyed to China the need for debt restructure, and for “all the creditors to sing from the same hymn sheet.” Further, he has sought Japan’s help in negotiating with Sri Lanka’s other creditors. However, both countries appeared to signal that the ball was in Sri Lanka's court.
Asked if China was agreeable to a debt restructure programme with Sri Lanka to make the island nation eligible for IMF support, a spokesman at the Chinese Embassy in Colombo told The Hindu on Thursday that as a “traditional friendly neighbour” of Sri Lanka and a “major shareholder” of the IMF, China has “always been encouraging” the IMF and other international financial institutions “to continue to play a positive role in supporting Sri Lanka’s response to current difficulties, efforts to ease debt burden and realise sustainable development.”
“On bilateral financial cooperation, shortly after the Sri Lankan government announced to suspend international debt payments in April 2022, Chinese financial institutions reached out to the Sri Lankan side and expressed their readiness to find a proper way to handle the matured debts related to China and help Sri Lanka overcome the current difficulties. We hope Sri Lanka will work actively with China in a similar spirit and work out a feasible solution expeditiously,” the spokesman said.
Responding to a query from The Hindu, the Japanese Embassy in Colombo said on Thursday that “it is important for the Government of Sri Lanka, in collaboration with the IMF and Paris Club, to work for the betterment of its economic and fiscal situation while securing transparency.”
On whether Japan would take the lead in talking to Sri Lanka’s creditors, the Embassy's response suggested that Tokyo would wait and watch Sri Lanka’s progress before intervening. “Assessing the progress and the situation in Sri Lanka, Japan will further consider appropriate responses in consultation with the Government of Sri Lanka, and other donor countries and organisations," the Embassy said in a written response.
Queried on India’s response to the IMF’s staff-level agreement with Sri Lanka at the Ministry of External Affairs’ weekly briefing in New Delhi, spokesperson Arindam Bagchi said it was an “evolving, unfolding story”, pending subsequent approvals from the Fund’s Executive Board.
“India has been advocating for assistance to Sri Lanka but let us see how it progresses. Issues of creditor equitability and transparency are important,” Mr. Bagchi said.
Prior to the nearly-$4 billion that India extended to the island nation this year in the wake of the crisis, Sri Lanka owed about $960 million to India.