According to the International Monetary Fund, Sri Lanka is facing “solvency” concerns as a result of risks posed by unsustainable debt levels, which are jeopardizing the country’s economy.
“According to staff analysis, the fiscal consolidation required to reduce debt to safe levels would necessitate excessive adjustment over the next years, pointing to a significant solvency problem,” the IMF stated in its Article IV consultation report, which was released in Washington on Friday.
The whole research delves deeper into the debt and economics of the South Asian island nation. Sri Lanka has unsustainable debt levels, according to a summary of the document issued earlier this month, and needed a “credible and comprehensive” approach to restore stability.
According to the research, the country’s “debt overhang,” as well as persistent budgetary and balance-of-payments shortfalls, “would restrict development and jeopardize macroeconomic stability in the near and medium term.”
“The danger of a rollover is very significant,” the IMF said. “[Foreign] debt servicing demands of $7 billion per year will necessitate access to very substantial quantities of external finance at concessionary rates and long maturities for many years.”
Since the IMF board considered the staff report in late February, a rise in oil prices and a loss of visitors due to the war in Ukraine have aggravated the country’s foreign exchange difficulties, pushing President Gotabaya Rajapaksa’s government to seek IMF assistance.
Negotiations on a prospective aid package are anticipated to begin in April, when President Mahinda Rajapaksa’s brother, Finance Minister Basil Rajapaksa, visits to Washington.
The country’s interest rates have been raised, the local currency has been devalued, and non-essential imports have been restricted as a result of the spiraling crisis.
Sultan Haitham said Oman will utilize its oil windfall to decrease public debt. Bloomberg calculations based on central bank data suggest Sri Lanka has around $2 billion in reserves vs $3.9 billion in foreign-currency debt due in the second half of 2022. This includes $1 billion in sovereign bonds that are due to mature in July.
The Central Bank of Sri Lanka said on Saturday that it is ready for a closer relationship with the IMF, and that it will work with the government “to ensure that the benefits of such an engagement outweigh any costs associated with it, from the perspective of the general public, as well as the business and investor community.”
The central bank governor, Ajith Nivard Cabraal, said on Thursday that Sri Lanka must be “prepared to manage the negatives” if it enters an IMF program. He didn’t go into detail.