The International Monetary Fund is expected to approve Sri Lanka’s long-awaited $2.9 billion, four-year bailout on March 20 after the crisis-hit government received fresh finance from China.
Tuesday saw the confirmation by the IMF and the island nation that Sri Lanka had received assurances from all of its principal bilateral creditors. This was a crucial step in deploying financing and a significant development for the nation, which is currently having its worst economic crisis since gaining independence from Britain in 1948.
Ranil Wickremesinghe, the president of Sri Lanka, told parliament that although there were signs that the economy was improving, there was still not enough foreign currency to cover all imports, making the IMF agreement essential so that other creditors could begin disbursing money.
Wickremesinghe stated that “Sri Lanka has fulfilled all preceding actions that were required by the IMF” and that a letter of intent had been issued to the IMF by him and the governor of the central bank.
IMF director Kristalina Georgieva posted on Twitter, “I welcome progress made by authorities in taking decisive policy & obtaining financing assurances from all their major creditors, including China, India & Paris Club,” adding that she was looking forward to presenting IMF-supported program to executive board on March 20.
The board typically won’t add topics to its agenda unless its members are prepared to act, thus approval is likely.
As a result of the announcement, both the nation’s foreign debt and currency appreciated. Bonds added about 3 cents to the dollar, and the Sri Lankan rupee increased by as much as 7.8% to a 10-month high. Equities ended the day up more than 2%.
The impasse was broken by a new letter the Export-Import Bank of China (EXIM) delivered to Sri Lanka on Monday. According to sources involved in the negotiations, EXIM offered “concrete and reliable” financing assurances for a debt restructuring with a clear connection to the IMF program.
The sources stated that the initial financial infusion was planned for release soon after the board meeting.
EXIM gave Sri Lanka a two-year debt moratorium in a letter in January, but sources claim this was insufficient to satisfy IMF requirements.
Theo Maret, senior research analyst in Paris, called this a “good development” because it may mark the first occasion when China has given the IMF conventional financial assurances outside of a Common Framework process.
According to IMF data, Sri Lanka owed EXIM $2.83 billion by the end of 2020, or 3.5% of its external debt. According to estimations by the China Africa Research Institute, Sri Lanka would owe Chinese lenders a total of $7.4 billion by the end of 2022, or nearly a quarter of its entire external debt.
Countries might use IMF assistance as a launching pad to access other finance sources. Two sources reported that Sri Lanka was in talks with India, its second-largest creditor, to extend a $1 billion credit line that was set to expire on March 17.
Wickremesinghe stated that Sri Lanka will have to continue working with the IMF and must make payments totaling $6 billion annually on average until 2029.
China and the Western economies have been at odds about how to offer debt relief, which has caused countries in debt difficulty like Zambia and Sri Lanka to experience unheard-of delays in receiving IMF bailouts.
After striking a preliminary agreement, Sri Lanka has been waiting for approximately 187 days to finalize a bailout. According to data obtained by Reuters, it took low- and middle-income countries 55 days on average over the past ten years to move from a tentative agreement to board approval.
Because of problems with creditor coordination and China’s hesitation, debt restructurings both inside and outside Common Framework have been taking longer, according to Patrick Curran of Tellimer. “The restructurings in Zambia and Sri Lanka are expected to set significant precedents for restructurings going forward.”
In response to a question on the eve of the annual meeting of the parliament, Qin added that China should be the last to be blamed for creating debt traps and urged other parties to share the responsibility.
