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Meera Sirinivasan
Central Bank Governor P. Nandalal Weerasinghe said Sri Lanka is awaiting funding guarantees from its bilateral creditors, including India and China, to secure support from the International Monetary Fund (IMF).
Last September, the IMF reached a staff-level agreement with Sri Lanka to provide $2.9 billion in aid to the island nation, which is facing its worst economic crisis in decades. The development comes months after Sri Lanka inflated the rupee, defaulted on its foreign debt and raised interest rates sharply to tighten monetary policy.
However, in order to approve the Enhanced Financing Facility (EFF) promised by the IMF Board, Sri Lanka must now secure sufficient funding from its creditors. Colombo is desperate for $2.9 billion, barely enough to cover two months of imports, but mainly to use the IMF package to secure more international credit as the country struggles to emerge from an economic nightmare. accidents that pushed people into the streets. Months of protests toppled the former Rajapaksa administration. President Ranil Wickremesinghe, who was elected by parliament, has promised to rebuild the island’s battered economy, but has acknowledged that the task will be a huge challenge.
Over the past few months, Sri Lanka has been negotiating with China, Japan and India, the three largest bilateral creditors, to restructure its multibillion-dollar debt. “We have shared all available information with lenders on both sides in an open, comparable and transparent manner. Now they will have to look at it and make a decision internally and come back to us…hopefully they will do it soon,” the Apex Bank president told The Hindu on Tuesday. Since then, India has emphasized the need for “creditor equity and transparency”, which means that Colombo should not give preferential treatment to borrowers during loan restructuring.
Sri Lanka had been aiming to get an IMF bailout before the end of the year, but bilateral talks have stalled. Governor Weerasinghe noted that talks with China have been “slightly delayed”, citing “internal issues” such as the Communist Party of China (CCP) National Congress in October and “Covid-19 restrictions” in China.
But he believes that the delay in talks with China is not the only reason why Sri Lanka is unable to secure an IMF package this year. Japan and its member Paris Club “know this business” [of debt restructure] They’ve “been doing this for years,” he said. “That’s why they’re more advanced in their relationship. They’ve analyzed and shared with non-Paris Club members like India and China,” Weerasinghe said: “Now it’s up to them.” He said it would take four to six weeks for the package to be approved by the IMF’s board of directors after lenders provide financing guarantees.
In addition to bilateral loans, the island nation has borrowed heavily over the years from private lenders, the nation’s largest source of foreign credit, with an outstanding debt of about $13 billion, as well as multilateral agencies. However, the focus is on bilateral lenders, who are instrumental in securing critical IMF support for Sri Lanka. The governor said that the low-interest, long-term multilateral loans will not be restructured, and that real negotiations with commercial lenders will take place only after the IMF program is implemented.
With Colombo defaulting on $51 billion in foreign debt — which the governor said was a “debt freeze” in the face of a severe default — his next move was to limit imports to essentials, nearly $4 billion in Indian aid, some repurposed funds, Sri Lanka. Attempts to obtain funding for the bridge have been unsuccessful over the past few months. “We can now manage without bridge funding, we have been managing since July,” Weerasinghe said. “With export earnings, workers’ remittances, and some support from the Asian Development Bank and the World Bank, we can manage,” he said.
Sri Lanka’s imports still exceed exports by millions of dollars, but the goods trade deficit narrowed significantly in October 2022 compared to the previous year, the central bank said recently. “Exports may decline as global demand declines … which will also affect imports.”
Economists in Sri Lanka say the economy is on a hopeless path, but a senior official tried to give more hope, citing tourism and remittance income as “spin-offs”. According to official data, from January to October 2022, tourism revenue will exceed $1 billion, and workers’ remittances will increase to $3 billion during this period.
On how Sri Lanka plans to get out of the debt cycle, Weerasinghe said Sri Lanka is looking for “discounted, long-term loans” rather than just multilateral agencies. “And the concessions we expect from other lenders are grace periods and extensions, so our debt service burden over the next few years will be much lower than if we hadn’t chosen to restructure,” he said. Sri Lanka has a debt service obligation of US$ 6 billion per year for the next few years. “So what we’re asking our lenders for is a little bit of relief, so we’re paying over the next 20 years, not the next four or five years.”
Reflecting on Sri Lanka’s previous approach to borrowing, Weerasinghe noted that it was a mistake for the country to borrow from abroad and spend domestically instead of using it for exports to build capacity, including repaying loans from Sri Lanka. own income. “That was the problem,” he said. (The Hindu)
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