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Sri Lanka forced into IMF U-turn after financial crisis sparks protests

Sri Lanka has begun talks with the IMF over a debt relief package after protests over a deepening economic crisis forced Gotabaya Rajapaksa’s government into a policy U-turn.

The president told the country on Wednesday night that he was “attempting to immediately resolve this crisis and provide relief to the people”.

“Subsequent to my discussions with the International Monetary Fund, I have decided to work with them,” Rajapaksa said, according to a transcript of his comments by Sri Lanka’s Daily FT newspaper. “Through those discussions, we hope to find a way to pay off our annual loan instalments, sovereign bonds and so on.”

Sri Lanka has for months faced mounting economic pain as its depleted foreign currency reserves triggered shortages of imports and fuel, power blackouts and double-digit inflation.

Thousands of protesters and opposition parties gathered in Colombo this week calling on Rajapaksa’s government to resign over its handling of the economy.

The government has until now insisted that Sri Lanka would be able to navigate the crisis without IMF assistance. But its strategy, which involved securing bilateral aid from countries such as India and a post-pandemic revival in tourism, was dismissed by many investors and analysts as unrealistic.

The island nation had debt and interest repayments worth about $7bn due this year, its finance minister Basil Rajapaksa told the Financial Times in January. But analysts estimate that usable foreign currency reserves have fallen as low as $500mn.

Among its more immediate challenges is a $1bn bond due in July, which many investors are sceptical Colombo will be able to repay without restructuring.

Sri Lanka is Asia’s largest high-yield bond issuer, borrowing heavily in the years following the end of its 2009 civil war. It has never defaulted.

About one-third of its debts are owed to international bondholders while other large creditors include countries such as China and India. It is expected to finalise a $1bn credit line this week with New Delhi.

However, after Rajapaksa came to power in 2019, his government introduced large tax cuts that eroded Sri Lanka’s revenue base. Combined with the blow to tourism from the Covid-19 pandemic, it prompted a series of rating downgrades into junk territory, leaving Sri Lanka locked out of international debt markets and unable to refinance.

Analysts said that any programme with the IMF would probably involve restructuring its debts to bring them to sustainable levels.

In a consultation document with Sri Lanka released this month, the IMF warned that challenges included “public debt that has risen to unsustainable levels, low international reserves and persistently large financing needs in the coming years”.

If it restructures, Sri Lanka will join countries such as Suriname, Belize, Zambia and Ecuador that have defaulted on their debts during the pandemic.


Source: Economy - ft.com

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