FITCH REMAINS CAUTIOUS AFTER SRI LANKA SECURES IMF DEAL

Recall the LORT trilogy. Sri Lanka securing the IMF Extended Fund Facility for $2.9 billion is like the respite, rest, and resuscitation Imladris offered the four Hobbits after their disastrous encounter atop the Watch Tower of Amon Sul. The journey proper had not even begun!

Securing IMF support was crucial: there is nothing to celebrate, for the same reason why attempts to spread dissent or stifle the programme are anything but inane and insane. What we do next will determine the fate of this country.

Yes, the programme would release IMF funding, unlock additional financing from multilateral creditors, and help bolster foreign-exchange reserves – already at a low $2.2 billion in February 2023. The improved liquidity could support macroeconomic stability and ease inflation and the exchange rate. That is according to Fitch in a March 2023 statement.

However, the rating agency was also quick to point out the obvious: potential upsides to the economic outlook will remain constrained until Sri Lanka concludes debt restructuring agreements with its creditors.

“The prospects of a deal with creditors remain unclear for now. We view recent developments as positive for debt negotiations, partly because they suggest that official financing assurances from creditors are consistent with the parameters of the IMF programme that seeks to return the debt to sustainable levels.”

Restructuring talks could continue for a long time yet. Zambia, for example, secured an IMF programme in August 2022 but is yet to finalize its debt restructuring. Even if Sri Lanka has better alignment with its official creditors, Fitch cautions, talks with private-sector creditors could raise further complications. The matter of including local-currency debt in any restructuring or not will likely complicate debt negotiations, the rating agency said.

The IMF may move the rating needle once we complete a commercial debt restructuring plan that it deems would restore the relationship with the international financial community.

A lot hinges on normalizing relation – ships with creditors. Sri Lanka must demonstrate commitment to reforms: not to placate its creditors or the IMF but to place the country on firmer economic foundations for growth by attracting FDI instead of debt.