Sri Lanka forced into IMF U-turn after financial crisis sparks protests

Sri Lanka has begun talks with the IMF over a debt reduction bundle after protests over a deepening financial disaster compelled Gotabaya Rajapaksa’s authorities right into a coverage U-turn.

The president advised the nation on Wednesday night time that he was “making an attempt to instantly resolve this disaster and supply reduction to the folks”.

“Subsequent to my discussions with the Worldwide Financial Fund, I’ve determined to work with them,” Rajapaksa mentioned, in response to a transcript of his feedback by Sri Lanka’s Day by day FT newspaper. “By these discussions, we hope to discover a approach to repay our annual mortgage instalments, sovereign bonds and so forth.”

Sri Lanka has for months confronted mounting financial ache as its depleted overseas forex reserves triggered shortages of imports and gas, energy blackouts and double-digit inflation.

Hundreds of protesters and opposition events gathered in Colombo this week calling on Rajapaksa’s authorities to resign over its dealing with of the financial system.

The federal government has till now insisted that Sri Lanka would be capable of navigate the disaster with out IMF help. However its technique, which concerned securing bilateral support from international locations resembling India and a post-pandemic revival in tourism, was dismissed by many buyers and analysts as unrealistic.

The island nation had debt and curiosity repayments price about $7bn due this yr, its finance minister Basil Rajapaksa advised the Monetary Instances in January. However analysts estimate that usable overseas forex reserves have fallen as little as $500mn.

Amongst its extra quick challenges is a $1bn bond due in July, which many buyers are sceptical Colombo will be capable of repay with out restructuring.

Sri Lanka is Asia’s largest high-yield bond issuer, borrowing closely within the years following the top of its 2009 civil struggle. It has by no means defaulted.

About one-third of its money owed are owed to worldwide bondholders whereas different giant collectors embody international locations resembling China and India. It’s anticipated to finalise a $1bn credit score line this week with New Delhi.

Nonetheless, after Rajapaksa got here to energy in 2019, his authorities launched giant tax cuts that eroded Sri Lanka’s income base. Mixed with the blow to tourism from the Covid-19 pandemic, it prompted a sequence of ranking downgrades into junk territory, leaving Sri Lanka locked out of worldwide debt markets and unable to refinance.

Analysts mentioned that any programme with the IMF would most likely contain restructuring its money owed to deliver them to sustainable ranges.

In a session doc with Sri Lanka launched this month, the IMF warned that challenges included “public debt that has risen to unsustainable ranges, low worldwide reserves and persistently giant financing wants within the coming years”.

If it restructures, Sri Lanka will be a part of international locations resembling Suriname, Belize, Zambia and Ecuador which have defaulted on their money owed through the pandemic.