IMF Expresses Debt Sustainability Concerns Risking Sri Lanka’s Bailout
By: Staff Writer
October 06, Colombo (LNW): The International Monetary Fund (IMF) has raised alarms over the potential risks of disputing Sri Lanka’s current debt sustainability assessment (DSA), cautioning that such challenges could jeopardize the country’s bailout program and delay crucial financial support by months or even years.
The IMF requires countries seeking assistance to prove their debt is sustainable. Should Sri Lanka’s debt be deemed unsustainable, the IMF would be unable to proceed with the bailout, highlighting the need for the country’s debt restructuring efforts to adhere to IMF guidelines to secure necessary relief and achieve debt targets.
Sri Lanka has made significant strides under the current IMF program, though its recovery remains fragile. IMF Senior Mission Chief Peter Breuer emphasized the importance of continuing reforms to promote stable, inclusive growth, cautioning that failing to do so could lead to a relapse into crisis.
A major hurdle lies in achieving the primary fiscal balance—excluding interest payments—needed to restore debt sustainability. By 2025, this balance must reach at least 2-3% of GDP based on realistic budget projections, Breuer stated.
However, some economic experts, including a former Treasury Secretary who chose to remain anonymous, have criticized the IMF’s DSA methodology.
They argue that the projected reduction in external debt is insufficient and that restructuring domestic debt places undue burden on the working population by causing pension funds, which hold sovereign debt, to bear losses.
These critics argue that efforts should be directed toward reducing foreign currency-denominated debt to provide the necessary relief.
Recent reports suggested that Sri Lanka had not conducted its own DSA during debt restructuring negotiations. In response, the Finance Ministry clarified that while amendments to IMF agreements have been made in the past, the current situation is different due to the central role of debt restructuring in the ongoing IMF-backed economic reform program.
Sri Lanka is now part of the IMF’s Market Access Sovereign Risk and Debt Sustainability Framework (MAC SRDSF), a model used to assess the debt sustainability of middle-income countries. This framework has stringent debt targets that can only be adjusted in the event of significant changes in circumstances.
Sri Lanka, with the help of debt advisors, has developed its own internal DSA to guide its negotiating strategy, but the IMF’s DSA remains the independent standard to ensure any agreements with creditors meet required debt relief targets.
The opposingof the IMF’s DSA could cause severe delays in obtaining financial support, which would have devastating effects on Sri Lanka’s fragile economy. The Ministry advocates for a pragmatic approach, stressing the importance of timely action to safeguard the country’s economic future.
