The International Monetary Fund (IMF) will soon be discussing Sri Lanka’s economic issues with the country’s respective ministers and is closely monitoring the island nation’s economic and political situation, the organization stated.
“IMF staff is looking forward to program discussions with the authorities, including during the visit of the newly appointed Finance Minister to Washington later this month,” IMF Sri Lanka mission chief Masahiro Nozaki said to Reuters.
Sri Lankan President Gotabaya Rajapaksa dissolved his cabinet April 4 and has appointed a new finance minister, while also looking for a new governor for the central bank.
During an IMF press briefing on March 31, spokesman Gerry Rice indicated that the IMF will discuss Sri Lanka’s issues during the new finance minister’s visit. He affirmed that Colombo, the country’s capital city and seat of government, has “expressed interest” in the organization’s support and financial programs.
The Sri Lankan government had earlier been resistant to availing itself of the IMF’s support. But Colombo recently began to reverse its stance. In a television interview in March 2022, Lands Minister S. M. Chandrasena stated that the cabinet endorsed the finance minister’s IMF support plan.
Sri Lanka’s economic crisis has been triggered largely due to a shortage of foreign currency. The COVID-19 pandemic led to a significant fall in tourism. In addition, foreign direct investment declined and exports have slumped.
These factors had a detrimental effect on the country’s foreign exchange (FX) reserves, which have fallen below $1 billion, according to The Diplomat. The country is due to pay $4 billion in debt this year, including $1 billion bond which matures in July 2022, and the Sri Lankan rupee has fallen by over 45 percent against the U.S. dollar since the beginning of March 2022.
In total, the country has about $51 billion in foreign debts, Aljazeera reported.
“Public debt has become unsustainable, and gross reserves are critically low and insufficient to cover near-term debt service needs. While the authorities’ efforts to raise new FX financing could provide breathing space in the short term, it remains unclear how the large FX debt service obligations beyond 2022 can be met,” the IMF had said about the Sri Lankan economy in a March 2022 report.
The organization recommended that Colombo develop a comprehensive strategy to restore debt sustainability, tighten its near-term monetary policy to rein in inflation, and gradually restore a flexible and market-determined exchange rate, among other suggestions.
Though borrowing from the IMF means that Colombo will have to follow the organization’s guidelines, the advantage of being in an IMF program and implementing these policies is that foreign investors will have “more confidence” in the country, Dr. W.A. Wijewardena, the former deputy governor of the Central Bank of Sri Lanka (CBSL), said in an interview with Moneycontrol.
“Sovereign bonds that are being traded now below par value will move up and probably will trade at face value or close to the face value,” he said.