LONDON/COLOMBO: Sri Lanka's International Monetary Fund bailout may be a turnaround from the worst of its financial crisis, but unstable politics and the need to secure debt relief from rival powers China, India and Japan mean tough times lie ahead.
President Ranil Wickremesinghe knows a lot of circles will need to be squared for the IMF's $2.9 billion lifeline to become a reality.
Spending cuts, tax hikes and debt write-downs are a common formula for bankrupt countries, but crisis veterans say there are some uniquely difficult elements here.
An impoverished population that forced former President Gotabaya Rajapaksa to flee in July still needs to accept Wickremesinghe, seen by many as of the same political ilk and a man who faces a bristling opposition. The country's borrowings are so complex that estimates of the total range anywhere from $85 billion to well over $100 billion.
"The government destroyed its revenue base with unsustainable tax cuts, it tried to hold the currency when tourism revenues collapsed and now it has no reserves in the bank and a population facing widespread poverty." According to the United Nations, a quarter of Sri Lanka's 22 million people do not have access to adequate and nutritious food.
The IMF's 4-year rescue plan provisionally agreed upon last week demands serious fiscal repair work and more autonomy for the central bank, which was ordered to frantically print money under Rajapaksa. To reach the IMF's target of increasing the primary budget surplus to 2.4% by 2025, Sri Lanka's economy needs to grow by around 6%, which has not been achieved for almost five years. It is expected to shrink by at least 8% this year.
The World Bank estimates Beijing's lending, which has funded costly projects from ports to stadiums, adds up to $7 billion, or 12% of Sri Lanka's $63 billion external debt. Japan has provided another $3.5 billion while India has provided around $1 billion. Without the "assurances" from those countries, the Fund's money cannot flow, IMF Mission Chief Peter Breuer stressed.
Sri Lanka is in the biggest crisis since independence from Britain in 1948. The rupee has nearly halved since the central bank abandoned its peg in March, basic goods are in short supply and inflation is now at 64%.
Economists say restructuring would have been much simpler if the country had been part of the G20 "Common Framework" plan - a program set up at the height of COVID-19 to help debt-ridden countries. At that time, Sri Lanka was classified as a middle-income country and did not qualify.
Another problem is what to do about the country's $50.5 billion of "local" debt mostly dominated by the rupee and largely held as capital by commercial banks and local pension funds.
Even that might not be enough though, given the IMF wants the debt-to-GDP ratio slashed to under 100% from 140% currently.
That would put domestic debt in play but David Beers, a Senior Fellow at the London-based Center for Financial Stability who has compiled a global database of sovereign defaults said there are always tradeoffs.
-Reuters