Sri Lanka May Miss Next Month’s IMF Loan Deadline: Analysts

Sri Lanka is likely to miss next month's deadline for securing an International Monetary Fund (IMF) loan, according to financial analysts in Washington.

According to a Sri Lankan newspaper, if the country misses the December IMF deadline, it will have to wait until March 2023 to receive a USD 2.9 billion loan from the IMF in eight equal instalments.

Sri Lanka is experiencing a macroeconomic crisis that is unprecedented. Years of fiscal indiscipline and risky commercial borrowing have resulted in unsustainable levels of public debt. As the country continued to service debt and facilitate imports without access to international financial markets, official reserves and net foreign assets in the banking system were depleted.

According to the Daily Mirror, even as the risk of default grows, China, the island nation's primary bilateral debtor, has shown little or no interest in restructuring its debt.

“We will gain a significant advantage if we can move quickly and reach an agreement by December, which means reaching an agreement by mid-November and presenting it to the IMF Board in mid-December. However, I doubt we will be able to do so because, in China, the focus has shifted since the 20th Party Congress. According to Sri Lankan President Ranil Wickremesinghe, we must aim to have it by January.

According to a World Bank report, the lack of foreign exchange liquidity has resulted in shortages of fuel, food, medicines, cooking gas and other economic inputs.

In the face of depleted reserves, Sri Lanka suspended external debt service in April 2022 and appointed financial and legal advisors to assist with debt restructuring. Inflation has had a negative impact on real incomes, food security and living standards.

Before the Covid-19 pandemic, the economy was already showing signs of strain. Growth and poverty reduction had slowed in the five years preceding the pandemic. External imbalances had been exacerbated by a restrictive trade regime, a poor investment climate, episodes of loose monetary policy and an administered exchange rate.

In addition to these pre-existing fiscal imbalances, the 2019 tax cuts contributed to a rapid increase in debt to unsustainable levels. Sri Lanka lost access to international financial markets in 2020 as a result of credit rating downgrades.

As the crisis worsened, Sri Lanka sought IMF assistance. In September 2022, the IMF and authorities reached a staff-level agreement on a 48-month Extended Fund Facility programme worth approximately USD 2.9 billion.

However, before the IMF can provide financial assistance, official creditors must provide financing assurances to restore debt sustainability and make a good faith effort to reach a collaborative agreement with private creditors.