Sri Lanka, not IMF, should restructure debts: Jayasundera

ECONOMYNEXT – Sri Lanka itself should restructure its loans instead of seeking the assistance of the International Monetary Fund (IMF) and the government has been reducing sovereign debts in that strategy, Presidential Secretary P B Jayasundera said this week.

Moody’s downgraded Sri Lanka’s sovereign rating by slashed one notch down to Caa2 from Caa1 to near default category and global fund managers and analysts have warned Sri Lanka to start IMF discussions seeking debt restructuring.

Sri Lanka is facing a risk of sovereign debt default, analysts say, as its expected foreign inflows are less than the expected foreign outflows amid a depleting foreign reserves after the central bank’s excess money printing resulted in unabated imports despite stringent regulations to cut imports.

Jayasundera, Sri Lanka’s top civil servant and former finance secretary who still has a considerable influence in economic policies, said the government still does not see a need for IMF debt restructuring.

“I don’t see any reason to go to the IMF to restructure the loans. We should restructure the loans by ourselves,” Jayasundera told a virtual news briefing on Tuesday (02) held at Presidential Media Centre.

“We have been hearing about this debt restructuring, default, and need to go to the IMF for the past two years. But meantime we have reduced our sovereign debt by 2 billion US dollars to 13 billion US dollars.”

In a debt restructuring or a distressed debt exchange (DDE) is done by negotiators between the sovereign and a representative committee of bond holders.

However the presence of an IMF program and a sign off on debt sustainability, give confidence to bond holders to accept the re-structuring.

A fully-financed IMF program also unlocks further budget support loans if the government is willing to do growth generating reforms as well as Paris club relief.

Analysts have also warned that Sri Lanka’s reduction of government debt has come from a run-down of foreign reserves and a increasing net indebtedness of the central bank due to liquidity injections.

Jayasundera in September told EconomyNext that the IMF will “definitely” have a role to play in Sri Lanka’s post-Covid-19 economic recovery, but that will be after the authorities formulate the policy framework through the 2022 budget which will be presented on Nov. 12.

Speculations over President Gotabaya Rajapaksa’s administration going to the IMF are on the rise amid risk of sovereign debt default and possible collapse in the rupee currency. However, the government has strongly denied that it was going to the global lender.

Treasury Secretary S R Attygala participating in the same briefing said the government has reduced the foreign debt to 40 percent of the GDP now compared to 50 percent in early 2019 while facing all the risks.

Facing the foreign exchange crisis, the central bank has already started its informal road shows to meet foreign investors, Sri Lankan diaspora, central banks of other countries as well as commercial banks seeking for swaps with its counterparts, investments into government securities, a borrowing through syndicated loan, or investment into government securities.

Central bank chief Ajith Nivard Cabraal was in Qatar late in October and met Qatari central bank officials and heads of Qatar National Bank, Doha Bank and The Commercial Bank Qatar, he said in a twitter.come message.

He is visiting the Middle East and attending an investor forum in Dubai to drum up investments to the country.

The central banks last week said many of the planned inflows are on the cards and some are at discussion levels.

Sri Lanka has outlined plans to bring in inflows, but analysts have said the core problem is to stem outflows, which are occurring due to liquidity injections by the central bank which are driving demand and domestic credit up.

Liquidity injection not only made it difficult to raise dollars to repay debt, but also used up reserves to pay for day-to-day imports. Sri Lanka’s imports are at at three-year high due to liquidity injections.

Sri Lanka is now planning credit lines for fuel, in effect incurring foreign debt for day to day living. (Colombo/Nov08/2021)

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