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The International Monetary Fund (IMF) on Wednesday said discussions with Sri Lanka on a potential loan program are at an early stage and any deal would require “adequate assurances” that the island country’s debts can be put on a sustainable path.
In a statement emailed to Reuters, IMF Sri Lanka Mission Chief Masahiro Nozaki said that IMF Managing Director Kristalina Georgieva discussed lending options and policy plans with a Sri Lankan delegation.
“An IMF-supported program 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 after protests in response to shortages of fuel and other essentials turned deadly on Tuesday and Sri Lanka’s Finance Minister formally asked the Fund for a Rapid Financing Instrument 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 Rapid Financing Instrument (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.
“The discussions are still at an early stage,” Nozaki said.
Meanwhile, India will provide an additional $500 million in financial assistance to Sri Lanka for it to buy fuel, Sri Lanka’s foreign minister told reporters on Wednesday, adding Bangladesh was also willing to postpone a $450 million in swap repayments.
“Assistance by the IMF will take about six months to come to us and it will come in tranches,” Sri Lankan Foreign Minister G L Peiris said. “During the intervening period, we need to find funds to keep our people supplied with essentials.”
Last week, India committed $2 billion in financial assistance to Sri Lanka while supporting the island nation with food and fuel.
Sri Lanka, hit by its worst economic crisis since independence in 1948 and on the brink of its first debt default, has been asking friendly nations including India and China for credit lines, food and energy. The Asian giants have already committed billions of dollars in financial support.
On March 29, the Bangladesh government said it was reconsidering Sri Lanka’s request for another loan of $250 million.
Earlier, Bangladesh, for the first time, went for a $250 million currency swap with the island nation.
It was the first-ever loan to any country from Bangladesh under the currency swap agreement inked by the BB and the Central Bank of Sri Lanka (CBSL) on August 3 last year.
The island nation’s debt load has apparently becoming increasingly difficult to manage as it also struggles to pay for imports of fuel and other necessities, leading to power cuts and other shortages.
