The IMF has indicated confidence that Sri Lanka would likely conclude debt restructuring agreements with international commercial creditors by July 2024.
“There is a strong expectation that agreements with commercial creditors consistent with programme parameters will be reached by the completion of the second review,” the Fund’s Communications Director, Julie Kozack, told reporters in Washington last April. Domestic debt restructuring was largely completed, she said.
President Ranil Wickremesinghe has said it was necessary to finalize bilateral and private creditor restructuring agreements to complete the second review of the IMF programme by June or July, ahead of upcoming elections slated for the last quarter of 2024.
The government aims to restructure 68% of its $30.8 billion foreign currency loans, with $20.3 billion held by private creditors.
Verite Research’s Debt Update of December 2023 reports that the 17-nation Official Creditor Committee (OCC) reached an “in principle” agreement last November to restructure Sri Lanka’s debt, aligning with IMF parameters. This agreement, similar to the one with China in October, is geared towards enabling Sri Lanka to meet the requirements for securing the second tranche of IMF funding.
Authorities are talking to International Sovereign Bond Holders and other creditors, such as the China Development Bank, to reach a comprehensive deal.
Sri Lanka must ensure China’s cooperation in sharing necessary information with the OCC and promptly reaching an agreement with private creditors on terms no less favourable than those with the OCC. However, this agreement doesn’t provide a substantive resolution for expediting the debt restructuring process.
Despite several painful macroeconomic adjustments, improving governance remains critical to attract investors, sustain the recovery and spur growth.
Verite Research notes, “Contrary to the unstable macroeconomic conditions of 2022 marked by soaring inflation and a currency depreciation of approximately 60%, 2023 has witnessed significant stabilization, especially in the monetary sector. Inflation and currency depreciation will stay below 3% for the year.
Additionally, Sri Lanka has proposed a budget for 2024 broadly aligning with its IMF programme targets. It necessitates a 45% increase in revenue from the 2023 level, with heavy reliance on an increased value-added tax (VAT) — from 15% to 18%— coupled with reduced exemptions to achieve this target. However, Sri Lanka has not met a budgeted revenue target in the last 23 years.”
Successfully negotiating favourable terms necessitates presenting our case in good faith, committing to addressing fundamental economic issues, including corruption-related matters such as budget credibility, expenditure control, public investment management, procurement, oversight of State-Owned Enterprises (SOEs), revenue policy transparency, central bank governance, financial sector regulations, land ownership security, and judicial integrity.
With elections looming, any political promises suggesting a reversal of reforms or renegotiation with the IMF risk putting the economy back in the loop, on the spiral to the bottom. While the SJB has called for opposition inclusion in debt restructuring talks with private ISB holders – and risk prolonging the negotiations – the NPP has suggested that quickly reaching an agreement about the extent of the haircuts and maturity extensions was necessary to put Sri Lanka on a sustainable footing.