Cooperation from Sri Lanka's creditors key for IMF bailout, says government

On 1 September, the International Monetary Fund announced that it will provide Sri Lanka with a loan of about $2.9 billion over a four-year period to help the island nation overcome the unprecedented economic turmoil

Press Trust of India September 24, 2022 12:41:52 IST
Cooperation from Sri Lanka's creditors key for IMF bailout, says government

Representational image. AFP

Colombo: The Sri Lankan government has said that cooperation from the island nation’s creditors would be key to gaining a much-needed bailout from the IMF for the bankrupt country.

On 1 September, the International Monetary Fund (IMF) announced that it will provide Sri Lanka with a loan of about $2.9 billion over a four-year period to help the island nation overcome the unprecedented economic turmoil.

The bailout package is expected to boost the country’s credit ratings and the confidence of international creditors and investors.

At an online engagement with the creditors, the government on Friday said that assurances from bilateral creditors are required as a prerequisite to the IMF board adoption of the programme. It is expected to materialise by mid-December.

The IMF does not lend to countries whose debt is deemed unsustainable, requiring Sri Lanka to undertake an upfront comprehensive debt treatment.

“In practice, this requires financing assurances to be given by the bilateral creditors, resulting in a sufficient level of comfort to the IMF that bilateral creditors will support Sri Lanka’s efforts to restore public debt sustainability,” the government said.

It added that bilateral financing assurances are a commitment from official bilateral creditors to grant Sri Lanka a debt treatment compatible with the macroeconomic framework and debt sustainability to underpin the contemplated IMF programme.

Explaining it further the government held that private financing assurances are considered as obtained by the IMF once Sri Lanka is making a good faith effort to reach a collaborative agreement with its private creditors, giving creditors the early opportunity to provide input in the framework underpinning the debt restructuring.

The severe economic downturn, weak Sri Lanka revenues, rising health expenditure and energy needs led to a worsening of the fiscal situation. While the decline in growth partly led to shrinking revenues, Sri Lanka had to increase spending to safeguard its population from a double-pronged health and energy crisis, primary balance, revenues and expenditures.

In mid-April, Sri Lanka declared its international debt default due to the forex crisis. The country owes $51 billion in foreign debt, of which $28 billion must be paid by 2027.

It was said that international bondholders have formed a creditor committee comprising close to 100 members. The group represents more than 55 per cent of the international bondholders.

A group of local private banks holding International Sovereign Bonds have also formed a group.

The presentation said the effective way to obtain financing assurances quickly is the creation of a bilateral creditor coordination platform. This would enable them to deliver financing assurances and validate the IMF programme through a fast-track the solution, allowing Sri Lanka’s economy to recover.

The country’s economy is expected to contract by 8.7 per cent in 2022 and inflation recently exceeded 60 per cent. The impact has been disproportionately borne by the poor and vulnerable, the IMF noted.

Sri Lanka, a country of 22 million, plunged into a political crisis in July after former President Gotabaya Rajapaksa fled the country following a popular public uprising against his government for mismanaging the economy.

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