SL to receive second tranche from IMF between Oct. and Dec. – FCR
Sri Lanka is expected to receive the second tranche of around USD 330 million from the IMF between October and December 2023 according to First Capital Research’s (FCR) Sri Lanka’s Economic rebound report.
This is expected to bring several benefits to Sri Lanka, including improved reserves, faster economic recovery, positive capital inflows to government securities, possible easing of interest rates, technical assistance from the IMF, and restored investor confidence. This is because negotiations for debt restructuring are projected to drag by at least 6 months from April to
September 2023, with the possibility of a further extension until December 2023.
“IMF approved a 48-month extended arrangement under the Extended Fund Facility (EFF) of SDR 2.3 Bn (395% of quota or USD 2.9Bn) for Sri Lanka which unlocks up to USD 7Bn in financing from the IMF, International Financial Institutions (IFIs), and multilateral agencies. Following the Executive Board’s decision, the IMF announced an immediate disbursement of SDR 254.0Mn (USD 333.Mn).
The EFF-supported program targets for Sri Lanka includes achieving fiscal consolidation, restoring debt sustainability and price stability, safeguarding financial stability, introducing structural reforms to reduce corruption risks, and promoting economic growth. The report also highlighted the steps that are being taken to strengthen the anti-corruption framework and improve fiscal transparency Strengthen risk-based AML/CFT supervision.
“The draft anti-corruption legislation (to receive Parliamentary approval by Jun 2023) should establish a transparent and merit-based method for selecting independent commission members. Comprehensive asset recovery provisions in compliance with ‘UN’s Convention against Corruption’ should be incorporated into draft legislation by Mar 2024.’
The Report also recalled the ‘Root cause of Sri Lanka’s Economic Crisis’ and said that the country’s vulnerabilities were worsened by the 2017 drought, 2018 political turmoil, and the 2019 terrorist attacks. Explaining further the report pointed out that due to limited reserves and high debt levels, the country was already struggling to repay external bonds when the pandemic hit.
“As a consequence, usable gross international reserves dropped from USD 7.6Bn in 2019 to USD 1.6Bn in 2021, insufficient for covering even a month’s worth of imports. Consequently, the country suspended external debt service in Apr 2022 and defaulted on international sovereign bonds in May 2022, leading to a nearly 40% depreciation of the rupee in just three months.” This caused a significant economic contraction and a surge in inflation.
Measures taken by Sri Lanka to tackle the economic crisis included tightening import restrictions and other balance of payment measures to address FX shortages and depreciation pressure. “Implemented a digital fuel rationing system to manage fuel access and increased financial assistance to support vulnerable groups. Downsized monetary financing, raised policy rates, introduced tax measures, introduced energy price mechanisms, raised electricity prices, and introduced structural reforms.”