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Friday September 30th, 2022

Sri Lanka IMF deal nod could be Jan 2023

ECONOMYNEXT – Sri Lanka is expecting get International Monetary Board approval for its program by December 22 to January 2023 after getting debt re-structuring assurances from bi-lateral lenders according to a presentation made to creditors.

Sri Lanka is encouraging bilateral creditors including Paris Club and India and China to form themselves in to an ad-hoc creditor platform and give financial assurances before December 2022.

Sri Lanka also has to complete a series of prior actions to get IMF board approval. Usually a country has end money, exchange policy conflicts and crush domestic investments to stabilize the external sector before getting the first draw down.

Sri Lanka has already raised taxes, raised energy prices and presented an interim budget.

Sri Lanka also has to present a 2023 budget to get IMF board approval which usually happens in November.

Sri Lanka also has to present a new central bank law.

A draft already compiled has the most vicious anchor conflicting soup, legalizing ‘flexible’ exchange rate (a reserve collecting soft-peg with no credibility) with ‘flexible’ inflation targeting (discretionary monetary policy to target an output gap and extend the credit cycle beyond that of the anchor currency triggering external crises especially when the US hikes rates) according to critics.

Flexible inflation targeting and the accompanying currency crises led to a steep rise in commercial debt over the past 7 years at the central government and the Ceylon Petroleum Corporation, while depressing growth (output shocks) as policy was tightened suddenly to close the hole in the BOP.

Sri Lanka now has to find a way to deal with SOE dollar debt – a type of ‘bridging finance’ as they are called in the island – accumulated while ‘flexible inflation targeting’ as well.

Sri Lanka has gone to the IMF 16 times due to its soft-peg, but managed to avoid default as the country did not have market access to borrow large volumes of foreign debt.

Market access countries in Latin America with anchor conflicts default with debt around 50 to 60 percent of GDP, revenue to GDP in excess of 20 percent of GDP, usually every two to 2.5 Fed cycles.

Sri Lanka also has to do some financial sector reforms including a resolution framework, participants said.

Central Bank Governor Nandalal Weerasinghe had told creditors, Sri Lanka could get IMF board approval by December, though the published presentation put a wider target of December 2022 to 2023.

Sri Lanka has to get assurances of re-structuring from bi-lateral creditors on before IMF Board approval.

Authorities are now promoting an ad hoc-bi-lateral creditor platform of Paris Club and non-Paris club lenders.

President Ranil Wickremesinghe had already met ambassadors and informed them.

Private debt re-structuring proper will start after the IMF board approval.

Private creditors will be kept informed. Details of economic plans will be shared with the advisors to creditors under non disclosure agreements.

Sri Lanka expecting to wrap up private debt re-structuring by June 2023.

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