Debtor-creditor insurance key to overcoming crisis – IMF

The staff-level agreement reached with Sri Lanka to support the economy is a positive signal of the Sri Lankan authorities’ commitment to political reforms conditional on the implementation of the support program supported by the Monetary Fund (IMF), said Peter Breuer, who led the IMF mission to Sri Lanka last week.

The agreement reached last week is an indication that Sri Lanka is seriously considering embarking on reforms and ensuring debt sustainability, Breuer said. However, he noted that the staff-level agreement is only the beginning of a long road ahead in the implementation of commitments subject to final approval by the IMF’s Executive Board.

Assurance for creditors depends on the continuation of the support program, the IMF team said.

Debt relief from Sri Lanka’s creditors and additional financing from multilateral partners will be needed to help ensure debt sustainability and close financing gaps. Assurances of funding to restore debt sustainability to Sri Lanka’s creditors and making a good faith effort to reach a collaborative agreement with private creditors are essential before the IMF can approve support to Sri Lanka, said Masahiro Nozaki from the IMF mission. Asked about China’s position as a major creditor, Nozaki said that if there was no assurance from creditors, Sri Lanka’s crisis would worsen and undermine the country’s ability to repay. Therefore, the collaboration of debtors and creditors is crucial to ensure Sri Lanka’s ability to repay, Nozaki said. According to media reports, China said, “The ball is in Sri Lanka’s court”, avoiding a direct response to Sri Lanka’s request to restructure debt.

The government has urged China to help Sri Lanka overcome the crisis by agreeing to a debt restructuring plan.

Experts say China’s assurance on debt restructuring will depend on Sri Lanka’s recovery from the current economic crisis.

The 2023 budget, which should be in line with the reforms, is crucial, the IMF team noted. Revised budget estimates project revenue to be 2 trillion rupees this year, down from the original projection of 2.23 trillion rupees, while expenditure is expected to reach 4.4 trillion rupees, beating previous estimates of 2.23 trillion rupees. 3,900 billion rupees.

IMF staff and Sri Lanka have reached a staff-level agreement to support the country’s economic policies with a 48-month arrangement under the Extended Financing Facility (EFF).

The arrangement is subject to the approval of IMF management and the Executive Board in the coming period, subject to the implementation by the authorities of prior actions and the obtaining of an assurance of financing from official creditors of Sri Lanka.

The objectives of the program are to restore macroeconomic stability and debt sustainability while preserving financial stability. Protect the vulnerable and step up structural reforms to tackle corruption, vulnerabilities and unlock Sri Lanka’s growth potential.

An international Monetary Fund mission led by Peter Breuer and Masahiro Nozaki visited Colombo from August 24 to September 1 to continue discussions on IMF support for Sri Lanka and the government’s overall reform program.

The IMF noted that Sri Lanka was facing an acute crisis. Vulnerabilities have increased due to insufficient external reserves and unsustainable public debt dynamics. The April debt moratorium led Sri Lanka to default on the country’s external obligations, and a critical level of foreign exchange reserves hampered the import of essential goods, including fuel, which further hampered the impending economic activity.

The economy is expected to contract by 8.7% in 2022 and inflation recently exceeded 60%. The impact has been borne disproportionately by the poor and vulnerable.

The global lender noted that the supported program relies on tax revenue collection by Sri Lanka to support fiscal consolidation. Starting from one of the lowest income levels in the world, the program will implement major tax reforms, including making personal income more progressive and broadening the corporate and VAT. The program aims to achieve a primary surplus of 2.3% of GDP by 2024.

Introduce cost-recovery based pricing for fuel and electricity to minimize fiscal risks arising from public enterprises, mitigate the impact of the current crisis on the poor and vulnerable by increasing social spending and improving coverage and targeting of social safety net programs, rebuilding foreign exchange reserves by restoring a flexible, market-determined exchange rate, supported by the comprehensive policy package under this category, and reducing vulnerabilities to corruption improving budget transparency and public financial management, introducing a stronger anti-corruption legal framework, and conducting an in-depth governance diagnostic supported by IMF technical assistance.