Sri Lanka’s probable IMF support deal positive for debt negotiations - Fitch | Sunday Observer

Sri Lanka’s probable IMF support deal positive for debt negotiations - Fitch

12 March, 2023

Fitch Ratings believes Sri Lanka is likely to secure financing support from the IMF after the fund’s Executive Board set a date of March 20 to review the USD2.9 billion staff-level agreement that the country signed with the IMF in September 2022.

“IMF funding should improve Sri Lanka’s external liquidity.”

“We view the announcement of a date for the Executive Board review as an indication that the IMF regards the financing assurances it has received from key official creditors as sufficiently credible to move forward.”

President Ranil Wickremesinghe on March 7 indicated that China had provided its support, following earlier assurances from India and Paris Club official creditors.

The President also indicated that Sri Lanka had completed all prior actions required under the IMF program.

Board approval of the program would release IMF funding and should unlock additional financing from multilateral creditors.

This would bolster official foreign exchange reserves, which have already risen 30% from their trough in October 2022. Nonetheless, reserves remain very low, at USD2.2 billion in February, equivalent to around one month of imports.”

“We expect improved external liquidity to support a broader strengthening of macroeconomic stability. The exchange rate has appreciated since late February 2023.

Month-on-month inflation had already moderated over 2H22, but the strengthening of the currency should further restrain price growth if it is sustained. Nonetheless, potential upsides to Sri Lanka’s economic outlook will remain constrained until its debt restructuring is agreed upon.”

“The prospects for a deal with creditors remain unclear for now. We view recent developments as positive for debt negotiations, partly because they suggest that official creditors’ financing assurances are consistent with the parameters of the IMF’s program that seeks to return debt to sustainable levels. However, restructuring talks could continue for a long time yet.”

The example of Zambia (Restricted Default, or RD), where an IMF support package was approved by the Board in August 2022 but debt restructuring talks are still ongoing, highlights this risk.