(Bloomberg) -- The International Monetary Fund said “significant progress” has been made toward an aid program for Sri Lanka, which it said will require restoring debt sustainability and financing assurances from the country’s creditors, as well as “far-reaching” tax reforms.
“The authorities’ monetary, fiscal policy and other actions since early April were important first steps to address the crisis,” the IMF said in a statement Thursday following meetings June 20-30 in Colombo. “The discussions will continue virtually with a view to reaching a staff-level agreement on the EFF arrangement in the near term,” it said, referring to the lender’s Extended Fund Facility.
The Washington-based lender has said Sri Lanka needs to whittle down existing debt to “sustainable” levels before it can receive any aid. On Thursday, it said that executive board approval “would require adequate financing assurances from Sri Lanka’s creditors that debt sustainability will be restored.”
Sri Lanka, which is experiencing its worst economic crisis since independence and defaulted on its international debt, needs at least $6 billion in the coming months to stabilize the nation’s finances devastated by years of policy missteps and the Covid-19 pandemic. With authorities now resorting to print money just to pay government salaries, the economy risks runaway inflation amid shortages of everything from fuel to medicines.
Read more: Sri Lanka’s Economy Has ‘Collapsed,’ Prime Minister Says
On Monday, Sri Lanka urged residents to stay home until July 10 to conserve fuel amid difficulties importing as suppliers insist on clearing past debts. Sri Lanka has requested from the IMF for both rapid aid and a longer-term loan, and any sign-off on the country’s debt plan would be signal to other creditors that the nation is doing enough toward qualifying for fresh funds.
Prime Minister Ranil Wickremesinghe, who also oversees the finance ministry, told Bloomberg News last month that the multilateral lender had sought a primary surplus of 2% of gross domestic product by 2025, while it was more likely that Sri Lanka will only break even or post a 1% surplus by then.
Read more: Sri Lanka Economy Shrinks Amid Political Chaos, Inflation
His government has taken steps to raise taxes, put state assets on sale and pledged to slash spending to the “bare bones.”
Sri Lanka hired Lazard Ltd. and Clifford Chance LLP in May to serve as financial and legal advisers on debt restructuring after the nation fell into default with the expiry of a 30-day grace period following missed interest payments on some sovereign bonds.
The country has to agree on a baseline for a debt sustainability analysis and work out what kind of offer it makes at separate restructuring talks with bondholders that include a group of the nation’s largest creditors -- Pacific Investment Management Co., T. Rowe Price Group Inc. and BlackRock Inc.
Wickremesinghe said last week that Sri Lanka is also planning to hold a credit aid conference with friendly nations, including India, Japan and China to secure fresh funding.
Meanwhile, Hamilton Reserve Bank Ltd., which holds more than $250 million of Sri Lanka’s 5.875% International Sovereign Bonds due July 25, last week filed a suit in a New York federal court seeking full payment of principal and interest.
The IMF said Sri Lanka also needs to address:
- Rising levels of inflation and the severe balance of payments pressures
- Corruption vulnerabilities and embark on growth-enhancing reforms
©2022 Bloomberg L.P.
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