On Friday, an official statement indicated that cash-strapped Sri Lanka is considering domestic debt restructuring options in the post-IMF bailout scenario to further stabilize its shaken economy.
This month, Sri Lanka received $330 million as the first tranche of the International Monetary Fund (IMF) bailout program, which will enable the debt-ridden country to achieve better “fiscal discipline” and “improved governance.”
After making an investor presentation on Thursday, the Governor of the Central Bank and the Secretary to the Treasury stated in a Sri Lankan government statement that “the Authorities are also exploring options for a domestic debt optimization (DDO) operation aimed at liquidity relief while preserving financial stability to avoid further eroding of Sri Lanka’s repayment capacity.”
The statement outlined that despite the ambitious fiscal consolidation efforts, Sri Lanka’s public debt trajectory is set to remain unsustainable in the absence of comprehensive debt treatment.
“Sri Lanka is also facing a significant external financing gap over the IMF program period.
This financing gap will have to be covered through new external funding and external debt service relief,” the statement said.
The IMF Board on March 20 approved Sri Lanka’s IMF program which Sri Lanka claimed would enable them to unlock up to $7 billion in funding from the IMF and other lenders.
“We fully commit to achieving fiscal consolidation and implementing fiscal structural reforms, in accordance with the IMF program.” restoring public debt sustainability; restoring price stability and rebuilding external buffers; safeguarding financial system stability; and reducing corruption vulnerabilities and further introducing growth-enhancing reforms,” the statement said.
It notes that the economy had already shown some encouraging stabilisation signs, with year-on-year inflation slowing down and earnings from tourism rebounding to more standard levels.
“We will continue to implement our reform agenda in order to support Sri Lanka’s economic recovery and successfully complete the IMF programme,” the statement said.
To move ahead, Sri Lanka is looking forward to reaching debt treatment agreements that are consistent with the IMF debt sustainability analysis and with the comparability of treatment principle.
Sri Lanka in April last year declared its first-ever debt default in its history as the worst economic crisis since independence from Britain in 1948 triggered by forex shortages sparked public protests.
Months-long street protests led to the ouster of the then-president Gotabaya Rajapaksa in mid-July.
Mr. Rajapaksa had started the IMF negotiations after refusing to tap the global lender for support for the cash-strapped island nation.
Sri Lanka has introduced painful economic measures such as tax hikes and utility rate hikes to unlock the programme.
Trade unions and Opposition groups have organised protests against such measures.