Lanka’s IMF support deal positive for debt negotiations – Fitch

Fitch Ratings believes Sri Lanka is likely to secure financing support from the IMF after the fund’s Executive Board set a date of 20 March to review the USD2.9 billion staff-level agreement that the country signed with the IMF in September 2022.

IMF funding should improve Sri Lanka’s external liquidity, but the timing of any debt restructuring agreement with official and private creditors remains uncertain.

“We view the announcement of a date for the Executive Board review as an indication that the IMF regards the financing assurances it has received from key official creditors as sufficiently credible to move forward. Sri Lanka’s president on 7 March indicated that China had provided its support, following earlier assurances from India and Paris Club official creditors.”

“The president also indicated that Sri Lanka had completed all prior actions required under the IMF programme, although the IMF Board will make its own assessment on this in deciding whether to approve the package.

Board approval of the programme would release IMF funding and should unlock additional financing from multilateral creditors. This would bolster official foreign- exchange reserves, which have already risen 30% from their trough in October 2022.

We expect improved external liquidity to support a broader strengthening of macroeconomic stability. The exchange rate has appreciated since late February 2023.

Month-on-month inflation had already moderated over 2H22, but the strengthening of the currency should further restrain price growth if it is sustained.

“We view recent developments as positive for debt negotiations, partly because they suggest that official creditors’ financing assurances are consistent with the parameters of the IMF’s programme that seeks to return debt to sustainable levels.”