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Sri Lanka is seeking up to $4bn to pay for essentials and
pay creditors, but it must show IMF a sustainable debt
plan.
The downward economic spiral has triggered political unrest in
Colombo [File: Bloomberg]
When Sri Lankan officials arrive in Washington this week to meet
with the International Monetary Fund amid an economic and political
crisis, the main question they’ll need to answer is how the country
plans to manage its billions in debt.
Sri Lanka is seeking up to $4 billion this year to
help it import essentials and pay creditors. To get any of that
through the IMF’s various programs, the government of President
Gotabaya Rajapaksa must present a sustainable debt program. That’s
a standard requirement for aid from the so-called lender of last
resort, even if a shortage of food, fuel and medicine is pushing
the country toward a humanitarian crisis.
The downward economic spiral — dwindling foreign reserves and
soaring inflation — has triggered political unrest in Colombo,
where Rajapaksa has resisted calls to step down despite growing
protests and a loss of coalition partners in parliament. Over the
weekend, the army denied speculation it planned to crack
down on protesters, while the local stock exchange announced it
would shut this week amid the uncertainty.
The outlook makes a default inevitable,
as acknowledged by S&P Global last week when it
downgraded Sri Lanka’s credit rating and warned of another cut if
the nation misses coupon payments due Monday. Meanwhile, investors
are trying to figure out how much they might recover on $12.6
billion of foreign bonds, and if there’s even profit to be
made.
The country’s dollar bond due July 2022 indicated 5.2 cents
higher on Monday to trade at 46 cents on the dollar, after a sharp
drop Friday.
Sri Lankan president Gotabaya Rajapaksa (pictured) has resisted
calls to resign [File: Getty Images]
Here are some IMF funding options in play as talks are due to
start this week:
Emergency Assistance
IMF members can access one-off emergency loans, with few
conditions, through the lender’s Rapid Credit Facility and Rapid
Financing Instrument. However, this payout is capped at 50% of a
state’s quota for a year, which in Sri Lanka’s case works out to
$395 million — or 289 million in special drawing rights, the IMF’s
unit of account. The nation has declared that it will prioritize
payments for food and fuel imports over debt servicing.
But even for that, Colombo needs to take steps toward
restructuring its debt, which the IMF staff last month determined
was unsustainable.
“When the IMF determines that a country’s debt is not
sustainable, the country needs to take steps to restore debt
sustainability prior to IMF lending,” Masahiro Nozaki, the IMF’s
mission chief for Sri Lanka, said in an emailed response to
questions. “Thus, approval of an IMF-supported program for Sri
Lanka would require adequate assurances that debt sustainability
will be restored.”
Meeting that criteria could include even initial steps like
hiring advisers, which the government is pursuing. The
administration has set a Friday deadline for applications
from financial and legal advisers, extending its original
date by a week. That makes Finance Minister Ali Sabry’s stated goal
of securing emergency funds as early as a week after negotiations
start look optimistic.
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Given Sri Lanka has a $1 billion bond maturing in July and more
repayments over the course of 2022, it will probably need access to
the IMF’s Stand-By Arrangement. Termed as its “workhorse”
instrument, Sri Lanka would be eligible for a loan of as much as
435% of its quota — roughly $3.4 billion, net of repayments — for
up to 36 months.
The payout can be front-loaded if the need is dire, but is
contingent upon the borrower agreeing to conditions such as
specific revenue and deficit targets.
Central bank Governor Nandalal Weerasinghe said last week that
it was too early to estimate a value of the lending that Sri Lanka
could get from the IMF or to confirm the type of program that the
lender could agree to.
While he said that an Extended Fund Facility — which allows
longer repayment periods — may be best suited to the country, it
typically requires deeper structural reforms. Sri Lanka had that
facility approved in 2016, and a Stand-By Arrangement before
it during the financial crisis of 2009.
Weerasinghe noted that Sri Lanka in the 2009 loan was approved
for access to 400% of its quota.
“I do not see why we cannot get at least that amount,” he said.
“Now the financial gap is much much higher.”
Debt Sustainability
Keeping deficits in check will entail extending the maturity of
existing debt and smaller interest payments. When the government
last week announced it would halt debt payments and
warned it was heading for an unprecedented default, Weerasinghe
said authorities were seeking to negotiate with creditors.
Nomura Holdings Inc. envisions an Ecuador-style restructuring
where Sri Lanka will swap notes for longer-dated bonds with lower
coupon rates and some reduction to principal. Barclays Plc said Sri
Lanka could roll all of its debt into a new bond with a final
maturity in 2037 and semi-annual amortizations starting in 2027;
coupons could be in the range of 4%-5%, lower than its current
average 6.6%.
Rajapaksa’s government has also appealed to China, one of its
biggest creditors, for an additional $2.5 billion in
support. While President Xi Jinping has pledged to help,
an apparent reluctance reflects both a rethink in its
external lending practices and a hesitancy to be seen interfering
in messy domestic political situations.
Earlier this month, Jin Liqun, president of the China-backed
Asian Infrastructure Investment Bank, encouraged Sri Lanka to turn
to the IMF. Neighbor India is also assisting Sri Lanka with credit
lines to purchase food and fuel.
Sabry, the finance minister, said last week that the country
will hold talks with other lenders, including the World Bank and
Asian Development Bank, adding that the country is committed to
honoring its debt. “We will pay every dollar we borrowed,” he
said.
Below are links to three articles about various economies. It is important to keep an eye on what is going on around the world, in part because what happens in other economies affects the U.S. economy. Please write a paragraph or two about your impressions from these articles. Does anything surprise you? What do you understand (or not understand) about these articles? Do you see any differences or similarities between what is going on in these countries and what is going on in the U.S. right now? Any other thoughts or impressions? You do not need to answer each of these questions or provide a complete analysis; my main goal is for you to tell me what you understand - or don't understand! A paragraph or two will be plenty