The near-term external debt servicing capacity of Sri Lanka has reached a really challenging position. Usable foreign reserves of the country have fallen to a miniscule and hence critical level of a mere US$ 100 million, sources at the Central Bank of Sri Lanka (CBSL) told Ceylon FT yesterday.
“There is yet no clear road map for managing the near-term external financing gap of the country. Currently, the Government for the most part is dependent on expensive local banking sector short-term currency swaps to finance its day-to-day external payments,” the sources said.
Sri Lanka’s total foreign currency loans, securities, and deposit obligations this year stood at US$ 6.9 billion, of which US$ 1.8 billion were due in the first three months of the year, according to the CBSL.
Hence, they point out that, in the next few weeks, the Government will inevitably have to embark on an IMF-initiated debt and economic restructuring programme.
Accordingly, the Minister of Finance Basil Rajapaksa is likely to formally initiate discussions with the IMF in the next few months, they predicted.
The final report of the IMF routine Article IV consultation group has already been submitted to CBSL and the Ministry of Finance for their observation and review.
They said the report will be submitted to the Executive Board of the IMF on 25 February 2022. The views of the Government of Sri Lanka will be included in the submission.
It is learnt that the report highlights the risk of default of its external debt by Sri Lanka together with its growing budget deficit, rising level of inflation and multiple exchange rates (Formal and informal markets).
Given the circumstances, the Government has decided to submit the IMF Article IV Report to the Cabinet this coming Monday and seek consent on the immediate steps to be undertaken in managing the economy.
CBSL sources said no other acceptable alternative solution or major foreign exchange inflow is available to significantly reverse the rapid depletion of foreign reserves of Sri Lanka.
Sources at CBSL, however, said CBSL is still in the process of securing a US$ 500-1,000 million swap facility with the State of Qatar.
Sri Lanka is eligible for IMF support under the four-year Extended Fund Facility (EFF), possibly about US$ 2 billion carrying an interest rate of less than 2 per cent.
An IMF programme will assist in restructuring the debt under the Paris Club and secure new facilities from the World Bank and enable re-entry into global capital markets.
There is a reasonable probability of achieving debt sustainability, removing import controls without facing a costly restructuring of commercial loans, economists said.
According to sources, the CBSL has requested for an extension of the US$ 400 million swap facility (under the SAARC Framework) received from the Reserve Bank of India and further deferral of the Asian Clearing Union (ACU) settlements. However, no positive response has been received so far, sources said.
A few weeks ago, the CBSL was able to defer over US$ 500 million settlements with the ACU by two months until March 2022. In recent years, the Government has taken steps to obtain several swap facilities under the SAARC Framework spanning 2019-2022. On all such occasions India has maintained that the assistance of IMF should be sought as a long-term solution.
In this backdrop, Sri Lanka has so far not been compelled to opt for an IMF-based programme due to assistance forthcoming from India on humanitarian grounds, but critics say the situation is likely to change in the future. The Government is also considering reaching more ‘bridging finance’ options through India, Japan, China and the Middle Eastern Nations to finance the day-to-day external obligations.
In this context, Japanese authorities have, however, insisted that for such a loan agreement it would be imperative for Sri Lanka to access an IMF programme.
Fitch Ratings estimates CBSL will need to arrange for some US$ 2.4 billion to help State-owned and private-sector firms in the country honour their debt obligations for 2022, over and above the US$ 4.5 billion central government debt.
The country also needs around US$ 20 billion for essential imports such as fuel, food and intermediate goods for exports.
As at end January 2022, the official gross foreign reserves of Sri Lanka was at the US$ 2.36 billion level, of which US$ 1.5 billion was derived from Chinese swap facilities that can only be used for limited import activities with China. In addition, the gross reserves included a US$ 200 million swap facility from Bangladesh and a US$ 400 million short-term swap facility with India. Sri Lanka has already deferred ACU payments worth US$ 510 million.