IMF says Sri Lanka needs to be on sustainable debt path

The International Monetary Fund (IMF) has said discussions with Sri Lanka on a potential IMF loan programme are at an early stage and any deal will require ‘adequate assurances’ that Sri Lanka’s debt could be put on a sustainable path.

In a statement emailed to the Reuters news agency, IMF Sri Lanka Mission Chief Masahiro Nozaki said that IMF Managing Director Kristalina Georgieva had discussed lending options and policy plans with a Sri Lankan delegation on Tuesday.

“An IMF-supported programme should be designed to resolve Sri Lanka’s acute balance of payments problems and put the economy back on a sustainable growth path as early as possible,” Nozaki said.

The statement came in the wake of Sri Lanka’s Finance Minister formally asking the Fund for a Rapid Financing Instrument (RFI) loan for countries needing urgent balance-of-payments support.

Nozaki said the IMF is “very concerned about the current economic crisis in Sri Lanka and hardships suffered by the people, especially the poor and vulnerable”.

But he noted that IMF staff had determined last month in an annual economic review that Sri Lanka’s public debt was unsustainable, and the country needs to take steps to restore debt sustainability prior to any IMF lending, including the emergency RFI.

Such restoration of debt sustainability typically requires a restructuring or reprofiling of public debts, which in Sri Lanka’s case would require cooperation from China, one of its largest bilateral creditors.

The IMF used the low-conditionality RFI loans extensively to assist countries during the COVID-19 pandemic and has provided such loans to ease balance of payments problems after natural disasters, conflicts and commodity price shocks.

“These considerations would need to be examined for a potential RFI for Sri Lanka, once adequate assurances are obtained that debt sustainability will be resolved,” Nozaki said.

He added that the specific design of a Sri Lanka IMF loan, including program targets and conditionality, would be agreed through extensive discussions between the government and IMF staff.