Sri Lanka faces clear 'solvency problem': IMF Report
Sri Lanka has been facing clear solvency issues triggered by the unsustainable debt levels which have put the nation's economy into disarray, according to an IMF report released on Friday.
"The fiscal consolidation necessary to bring debt down to safe levels would require excessive adjustment over the coming years, pointing to a clear solvency problem," IMF said in its Article IV consultation report.
A summary of the report released earlier in the month said Sri Lanka faced unsustainable debt levels and needed a "credible and coherent" strategy to restore stability, reported Bloomberg.
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The country's "debt overhang," along with persistent fiscal and balance-of-payments shortfalls, "will constrain growth and jeopardize macroeconomic stability in both the near and medium-term," the report said.
"Rollover risk is very high," the IMF said. "FX debt service needs of $7 billion each year will require access to very large amounts of external financing at concessional rates and long maturities, sustained over many years.
However, the IMF board considered the staff report in late February. Since then, a surge in oil prices and the loss of tourists because of the war in Ukraine have further deepened the crisis.
This has forced the government of President Gotabaya Rajapaksa to seek IMF aid. Negotiations on a possible aid package are expected to start in April, when Finance Minister Basil Rajapaksa, a brother of the president, travels to Washington.
The spiralling crisis has also led the country to raise interest rates, devalue the local currency and curb non-essential imports.
Besides, the monetary authority said in a statement on Saturday that the Central Bank of Sri Lanka stands ready for closer engagement with the IMF, working jointly with the government, "in order to ensure that the benefits of such an engagement outweigh any costs associated with the same, from the perspective of the general public, and the business and investor community."
As per two sources, the South Asian country has decided to seek an International Monetary Fund (IMF) rescue plan.
An IMF programme will likely focus on external debt restructuring, greater exchange-rate flexibility and better-targeted subsidies, which may hit the poor, an analyst said.
The amount of funding would depend on the specific goals set by an IMF programme as well as Sri Lanka's trade and fiscal deficits, analysts said, estimating an annual requirement of up to $3 billion from several multilateral and bilateral sources.
"If they have a credible IMF programme then there will be a period, perhaps six months to a year, maybe two, when it will be damn tough," the second source said.
