The technical discussions between Sri Lanka and the International Monetary Fund (IMF) on a potential loan programme will come to a close on May 24, IMF Spokesman Gerry Rice said.

Rice, addressing a virtual IMF briefing on Thursday (20), said that the agency is closely monitoring the events that are unfolding in the crisis-hit island nation.

Rice affirmed that the IMF remains committed to help Sri Lanka in line with the policies of the agency and that it would engage with the stakeholders in support of a timely resolution of the crisis that is being faced.

Commenting on the status of the economy, Rice said the IMF is concerned about the current economic crisis.

“We are concerned…especially, the hardships being endured by the people of Sri Lanka and especially many of those people poor and vulnerable. So, we are clearly monitoring the political and economic developments very closely,” Rice said.

Further, Rice said an IMF team has been engaged in technical discussions on the authorities’ request for an IMF-supported programme and the IMF has asked for the programme.

Sri Lanka’s central bank governor says he will stay in his position given an improvement in political stability in the midst of an economic crisis, and he would not step down as he had earlier warned.

Governor P Nandalal Weerasinghe also said on Thursday that the Central Bank of Sri Lanka had nearly finalised plans to restructure the country’s debt and proposals would be submitted to the cabinet soon, possibly by Friday.

The development comes as Sri Lanka fell into default, for the first time in its history, as the government struggles to halt its economic meltdown.

The nation of 22 million people is battling a devastating economic crisis as tax cuts by President Gotabaya Rajapaksa drained government coffers, COVID-19 hit the important tourism industry and rising oil prices emptied foreign exchange reserves.

On May 11 Weerasinghe had told reporters he would resign in two weeks in the absence of political stability as any steps the bank took to address the economic crisis would not be successful amid political turmoil.

Speaking to reporters after his bank announced it was holding its key lending and borrowing rates steady on Thursday, Weerasinghe said there had been positive political developments.

“Earlier, there was no prime minister and no cabinet. Comparatively, there has been significant improvement,” he said.

“We now have fresh appointments. We have also seen that our measures are working well. I would like to see a finance minister appointed. Now we are seeing improvement, so I think on that basis I intend to continue,” he said.

Opposition parliamentarian Ranil Wickremesinghe was named prime minister last week and he has made four cabinet appointments. However, he has yet to name a finance minister.

‘We cannot repay’
As a 30-day so-called grace period to make some already-overdue bond interest payments expired on Wednesday, Sri Lanka fell into default, the government acknowledged.

“We are in preemptive default. There can be technical definitions … From their side, they can consider it a default. Our position is very clear, until there is a debt restructure, we cannot repay,” Weerasinghe told reporters.

The coupon payments, originally due April 18, were worth $78m combined on notes maturing 2023 and 2028.

The central bank held rates steady following a massive 7 percentage point increase at its previous meeting and reiterated the need for more fiscal measures and political stability in the crisis-hit economy.

Weerasinghe said proposals on debt were nearly ready and could be sent to the Cabinet by Friday for approval.

He also said inflation could rise to 40 percent in the next couple of months but it was being driven largely by supply-side pressures and measures by the bank and government were already reining in demand-side inflation.

Inflation hit 29.8 percent in April with food prices expanding by 46.6 percent year on year.

US investment bank JPMorgan backed Sri Lanka’s crisis-hit government bonds on Wednesday, saying recent political changes should gradually improve its strains and help its talks with the International Monetary Fund.

Sri Lanka is still rated ‘Ca/stable’ after defaulting on a sovereign bond coupon, Moody’s Investors Service, a rating agency said after a 30 day grace period passed on May 18.

The Ca rating is typically associated with a recovery rate of 35 to 65 percent.

“For Sri Lanka, our weak recovery assumptions are driven by thesovereign’s very low foreign exchange reserve adequacy and the government’s very weak debt affordability,” the rating agency said.

“For Sri Lanka, our weak recovery assumptions are driven by the sovereign’s very low foreign exchange reserve adequacy and the government’s very weak debt affordability.”

Though gross reserves with a restricted use Chinese swap was 1.8 billion US dollars, Sri Lanka’s central bank is in debt and its net reserves are negative.

“Extensive delays to the implementation of fiscal adjustments and reforms, and the inability to secure a large, credible and secure external financing envelope from multilateral development partners may result in even lower recoveries than implied by the Ca rating,” Moody’s said.

“By contrast, any agreement with multilateral development partners that unlocks significant external financing – or prospects of such agreements – may gradually restore foreign investor confidence and crowd in private sector investment.”

With negative reserves, the central bank has been bankrolled by Asian Clearing Union payments due to the Reserve Bank of India, but monetary stability is yet to be restored with a float still to take hold.

The full Moody’s comment is reproduced below:

Government of Sri Lanka

Sovereign defaults due to missed payments on international bonds after expiry of the grace period

On 18 May, Sri Lanka (Ca stable) defaulted on its international bonds for the first time, after failing to make its coupon payments that were due on 18 April within the 30-day grace period. We expected the default given that the government had announced that it would suspend external debt-service payments as of 5pm local time on 12 April and pursue comprehensive external public debt restructuring in coordination with a potential International Monetary Fund (IMF) programme.

The current Ca rating is typically associated with a recovery rate of 35%-65%.

Our recovery rate assumptions are in line with a relatively wide range of precedents by defaulting sovereigns (see “Sovereigns – Global: Sovereign default and recovery rates, 1983-2021”, 14 April 2022). For Sri Lanka, our weak recovery assumptions are driven by the sovereign’s very low foreign exchange reserve adequacy and the government’s very weak debt affordability.

Sri Lanka’s foreign exchange reserves excluding gold and special drawing rights stood at $1.6 billion at the end of April 2022, sufficient to cover less than a one month of imports and far below the government’s external debt repayments of $4.0-$6.5 billion per year (excluding foreign-currency repayments on Sri Lanka Development Bonds and to Foreign Currency Banking Units) through at least 2025.

Without a large external financing envelope from development partners including the IMF, and in the context of a widening current account deficit because of higher global energy and food prices, Sri Lanka’s external position will remain very precarious even with the suspension of external public debt servicing.

Likewise, the government’s interest payments absorbed more than 70% of revenue in 2021, and we expect Sri Lanka’s debt affordability to remain weakest across rated sovereigns by some distance and for some time in the absence of fiscal reforms, even without the repayment of external debt. This is because revenue amounted to less than 9% of GDP, and domestic debt – which is not in scope of the government’s debt servicing suspension policy accounts for around 70% of interest payments.

We assume that Sri Lanka will eventually reach an agreement with the IMF for a funded programme. However, finalising the programme will likely take several months given the need for staff level agreement on both sides, followed by parliamentary approval in Sri Lanka and approval by the IMF’s executive board. The ongoing political and social unrest in Sri Lanka may slow the pace of negotiations, given the potential for changes in the political leadership or government. Any reluctance to implement politically difficult reforms, such as a significant and durable expansion of the government’s revenue base, which we think may be a possible programme requirement, could also delay an agreement.

Extensive delays to the implementation of fiscal adjustments and reforms, and the inability to secure a large, credible and secure external financing envelope from multilateral development partners may result in even lower recoveries than implied by the Ca rating.

By contrast, any agreement with multilateral development partners that unlocks significant external financing – or prospects of such agreements – may gradually restore foreign investor confidence and crowd in private sector investment. Combined with Sri Lanka’s tourism potential, a broadening of foreign exchange inflows may raise recovery prospects for private sector creditors.

Sri Lanka’s High Commissioner to India Milinda Moragoda met the National Security Advisor of India Ajit Kumar Doval, at the latter’s office in New Delhi on Thrusday.

During the discussion a comprehensive review of the status of the bilateral relationship was carried out and priority areas for future cooperation were deliberated on.

The discussion particularly focused on the present economic crisis in Sri Lanka. The High Commissioner thanked the National Security Advisor for the support that is extended by the Government of India to Sri Lanka to manage the situation.

In this context, High Commissioner Moragoda requested India’s assistance in garnering international support for the economic recovery of Sri Lanka, to which the National Security Advisor responded positively.

Deputy National Security Advisor of India Ambassador Vikram Misri and the Deputy High Commissioner of Sri Lanka in New Delhi Niluka Kadurugamuwa participated in the meeting.

Former Prime Minister Mahinda Rajapaksa should have retired from politics when his second term as the executive President ended, MP Chamal Rajapaksa told Parliament today. “One should be prepared to give up positions,” the MP said. “Rajapaksas who have been in Sri Lankan politics for 90 years have mortgaged many of their properties. We are still to release some properties,” he added. Refering to the incident on May 9 the MP said the IGP and Defence Secretary had failed to stop those who attacked the protesters at Gallle Face and in front of Temple Trees. These people were provoked suddenly. One wonders what the IGP and Defence Secretary were doing without stopping the attackers. The common notion today is that the IGP has become PIG” he said. Also he alleged that the JVP and Frontline Socialist Party were behind the attacks on government politicians. “JVP activists were clearly present during attacks in Hambantota,” he said.

Sri Lanka has missed a payment to Manila-based Asian Development Bank blocking fresh funds Prime Minister Ranil Wickremesinghe said amid warnings that the currency crisis-hit country could be locked out of multilateral funding in a new blow.

The Asian Development Bank and the World Bank also continued to fund Sri Lanka by re-purposing loans after the country was cut off from capital markets when it was downgraded to CCC.

The ADB and World Bank had just promised around 160 million each to Sri Lanka, Wickremesinghe said but the loan from the Manila-based lender was blocked.

“But because we could not repay three million US dollars last month it is stuck,” Wickremesinghe said.

“We are finding money for that.”

Multilateral Warning

Sri Lanka is facing the prospect of being locked out of financial assistance from multilateral organisations if its repayments are not maintained.

“If we do not pay the IMF (International Monetary Fund) and World Bank, that money will also not come,” ex-Finance Minister Ali Sabry said.

“That is the problem. As the Prime Minister said there are some payments due to ADB. It is a very big problem.”

Sri Lanka has already suspended repayments for international sovereign bonds, commercial bank loans, Exim bank loans and bilateral loans.

But multilateral lenders, as senior creditors are excluded.

“We decided on April 12, that we would not pay ISBs and everyone else except multilateral,” Sabry said.

“We did that because we had no option. By the 18th (of April) we had to pay 78 million dollars and we had to pay 105 million US dollars to a Chinese bank. We announced and defaulted.”

Sri Lanka is now negotiating a loan with the IMF. By April 2022, Sri Lanka had to pay 106.34 million US dollars and 12.4 million US dollars had been paid so far.

“Whether the payment is a billion or 10 billion we do not have a million to pay,” Wickremesinghe said promising to provide statistics to the parliament soon.

Sri Lanka had to repay 7,139 million US dollars in the year from March 2022. In April Sri Lanka had to pay 250 million US dollars made up of 145 million US dollars of principle and 106 million in interest.

Opposition legislator Harsha de Silva said from now on there were about 5.5 billion dollars to be paid in the coming 12 months, and 2.5 billion was suspended, leaving about 3.0 billion to be repaid.

Sri Lanka’s central bank is also deep in debt, owing money to the IMF, Reserve Bank of India and swap counterparties.

Sri Lanka was hit with chronic monetary instability from 2015 to 2022 as money was printed to keep interest rates down under ‘flexible inflation targeting’ and ‘output gap targeting’ triggering three currency crises, excessive foreign borrowings and eventual default.

Sri Lanka is now facing the worst currency crisis created by its 72-year-old soft-pegged central bank.

An attempt to shift to a floating exchange rate has so far not succeeded due to a surrender rule though interest rates have been raised to slow domestic credit and halt or reduce money printing.

With monetary stability yet to be restored authorities are now chasing after 3-4 billion US dollars of ‘bridging finance’.

Money will have to be printed to pay the salaries of state workers, Prime Minister Wickremesinghe said which will likely trigger more forex shortages.