Sri Lanka’s decision to seek emergency financing from the International Monetary Fund (IMF) under the Rapid Financing Instrument (RFI) has sparked caution among economic analysts, who warn the move could impose significant long-term costs amid the country’s already strained debt situation.
Economic think tank Verité Research highlighted that the effective cost of IMF RFI borrowing may exceed 6% in US dollar terms and more than 11% in Sri Lankan rupee terms when factoring in exchange rate fluctuations, Special Drawing Rights (SDR) valuations, and time-based surcharges. These surcharges alone add 2.75% to the loan after three years, making the debt potentially more expensive than other available financing alternatives.
Dr. Nishan de Mel, Executive Director at Verité Research, stressed that “knee-jerk” borrowing decisions in response to Cyclone Dakwah-related recovery spending could replicate past fiscal missteps. According to him, domestic funding options, including three-year rupee bonds yielding around 9%, or US dollar borrowing from local markets where Sri Lankans and the diaspora lend at approximately 5%, could provide cheaper alternatives.
Verité proposed creative financing mechanisms to mitigate costs. These included issuing a domestic US dollar bond through a yield-capped second-price auction or an ESG-linked International Sovereign Bond (ISB) tied to cyclone recovery KPIs and underwritten by a multilateral development bank. Both approaches could attract investment at lower yields while ensuring transparency in the use of funds.
The think tank also advocated for non-debt solutions, recommending that the Government pursue disaster recovery grants equivalent to 1% of GDP (around $1 billion) from multilateral and bilateral partners. Legal adjustments, such as temporarily lifting the 13% of GDP cap on primary expenditure under Section 16 of the Public Finance Management Act, were suggested to allow more flexible spending on recovery without worsening debt.
Despite these warnings, the Government expressed confidence in its RFI request, valued at SDR 150.5 million (approximately $200 million), noting that it would address immediate foreign exchange needs triggered by Cyclone Ditwah while keeping Sri Lanka’s broader IMF-supported reform program on track. Finance and Planning Deputy Minister Dr. Anil Jayantha Fernando stated that the emergency support was fully justified under IMF rules and would prevent destabilization of ongoing fiscal reforms.
Originally expecting a $347 million disbursement under the Extended Fund Facility (EFF) for December, Sri Lanka opted for the RFI after cyclone-related pressures intensified. An IMF team is slated to visit next month to adjust the staff-level agreement in line with the revised fiscal outlook, while safeguarding critical social protection measures.
Verité Research’s analysis underscores the delicate balancing act facing Sri Lanka: immediate relief versus long-term fiscal sustainability, urging policymakers to explore lower-cost and non-debt alternatives before committing to expensive emergency borrowing.
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