The final report of the International Monetary Fund (IMF) Article IV consultative group assessing economic and financial developments in Sri Lanka has been accepted unanimously by its Executive Board, a senior Central Bank (CB) official told Ceylon FT.
On February 25, the Executive Board of IMF concluded the Article IV consultation with Sri Lanka.
In response, the Lankan side had also made counter observations to which the Executive Board appears to have not been optimistic or accepted, he said.
However, he said, the Fund’s Article IV team had worked to unanimously approve the contents of the report.
The report was a comprehensive assessment of the economic and financial developments in Sri Lanka. It was prepared after lengthy discussions with the Government and CB officials on its economic and financial policies.
Accordingly, the final report including SL’s recommendations had been discussed at length at the Executive Council meeting held on that day.
Although it is the general practice of the IMF to issue an official press release within 24 hours of the Executive Board meeting, no official statement had been issued at the time of writing this report.
When inquired by an official of the CB in this regard, it was stated that the CB had made representations to make some changes in the official announcements of IMF regarding its debt sustainability interpretation.
He also said that the IMF would soon issue an official statement on whether or not to consider CB’s proposed request.
It was leant, according to the IMF debt sustainability analysts, SL’s Debt dynamics were worse than what was anticipated.
Based on the IMF, Article IV Consultation team Debt Sustainability Analysis (DSA), SL has a high risk of debt distress, with debt burden indicators well above the relevant thresholds in the baseline and all the stress scenarios.
Over the medium term, the public debt-to-GDP ratio is expected to increase moderately. In addition, lower foreign exchange reserve buffers will increase the potential distress concerns.
The IMF has forecast that SL’s central government Debt-to-GDP ratio will reach 110 per cent by 2021. This rate is likely to increase to over 115 per cent with borrowing from other public non-financial corporations and public financial corporations, including the CB. It also covers publicly guaranteed debt (debt the public sector does not hold but has an obligation to cover) and external public debt (debt held by non-residents of the country).
The Debt-to-GDP ratio should generally be around 85 per cent to implement the IMF-based Balance of Payment (BoP) support programme.
A country’s debt-carrying capacity depends on several factors, among them being the quality of institutions, debt management capacity, policies, and macroeconomic fundamentals.
Therefore, the IMF has taken into consideration the nation’s next three to five-year borrowing requirements, primary account status, inflation, economic growth trends and accessibility to external funding sources.
The DSA suggests that the most significant risks could result from worse-than-expected external flows and lower tourism income.
Global Credit Rating agencies including Fitch Ratings and Moody’s Investors Service recently cut the sovereign’s credit score deeper into junk territory citing delays in the government’s fundraising efforts.
It is expected that the next Article IV consultation with SL will be held on the standard 12-month cycle.