Major Debt Restructuring Deals on the cards before IMF talks
By: Staff Writer
Colombo (LNW): Sri Lanka expects to forge major deals in its debt restructuring this month as the International Monetary Fund (IMF) conducts the first review of its USD 3 billion loan program.
Legislators this week are likely to pass a bill amending tax laws, clearing a legal hurdle and allowing a domestic bond swap to be completed by mid-September, Governor of the Central Bank of Sri Lanka (CBSL) Dr. Nandalal Weerasinghe said at an investor forum on Tuesday (05 Sep.).
Meanwhile, officials are also expected to reach an agreement on how to restructure its foreign debt this month, he said.
After months of delay, Sri Lanka is stepping up efforts to fast-track its debt restructuring to help secure more funds from the IMF and set its economy back on track after it defaulted in 2022.
Sri Lanka’s dollar bondholders and lenders like China and India are closely watching the local debt exchange as creditors seek equal treatment.
Sri Lanka has met International Monetary Fund quantitative targets for June 2023 except state revenues, Central Bank Governor Nandalal Weerasinghe said.
The IMF program has a set of quantitative targets listed as ‘performance criteria’ which has to be mandatorily or seek a waiver and also indicative targets. The central government tax revenue floor of 1,300 billion rupees is an indicative target.
According to data already in the public domain, government tax revenues up to April was 742 billion rupees.
The performance criteria on the fiscal targets is the primary deficit of 113 billion rupees not the revenue target. By April the primary deficit was only 5.29 billion rupees. After June Sri Lanka has since hiked taxes on cigarettes and alcohol.
The IMF program had an inflation target of 31 percent measured by the Colombo Consumers Price Index. The actual was 12 percent.
The central bank was expected to bring down its net international reserves, which were a negative 3540 billion rupees by end December 2022 to 2830 million dollars (a 740 million dollar improvement) by June.
Sri Lanka’s gross reserves have now reached 3.5 billion dollars, Governor Weerasinghe said.Gross official reserves, not counting central bank borrowings, are up about 1.6 billion US dollars from December to June.
As interest rates fall, and credit recovers, the ability to collect reserves reduces. Analysts have warned that IMF programs usually fail in the second year, currencies depreciate due to rates being cut as inflation falls.
The falling currency then triggers public discontent, the electorate loses faith in reforms and reformist governments are overturned.