As Sri Lankan officials arrive Washington 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.
Reportedly, Sri Lanka is seeking up to US$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 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 on 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.
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 US$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 the 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.
Given Sri Lanka has a US$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 US$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.”
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%
to 5%, lower than its current average 6.6%.
Rajapaksa’s government has also appealed to China, one of
its biggest creditors, for an additional US$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.
As Sri Lanka is set to start IMF talks, what are its
options?
Sri Lanka is seeking up to US$4 billion to pay for
essentials and pay creditors, but it must show IMF a sustainable debt plan.
