IMF team talks to crisis-hit Sri Lanka on debt restructuring

People, including farmers, queue outside a petrol station, amid the country’s worst economic crisis, in Kilinochchi district, Sri Lanka, July 28, 2022. REUTERS/ Devjyot Ghoshal

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COLOMBO/LONDON, Aug 24 (Reuters) – A team from the International Monetary Fund (IMF) will meet the Sri Lankan president on Wednesday for talks aimed at finalizing a bailout package, including debt restructuring of about $29 billion. dollars, amid the country’s worst financial crisis in more than seven decades.

The IMF’s second such visit in three months comes as the Indian Ocean island seeks to strike a staff-level pact with the global lender for a possible $3 billion exit program. crisis.

“The IMF team will meet with the president and a delegation from the finance ministry later today,” an official from the presidential secretariat told Reuters, declining to be identified because he was not authorized to speak to the media.

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The team will also meet with the central bank governor and other officials, including representatives of Sri Lanka’s financial and legal advisers, Lazard’s and Clifford Chance.

The main stumbling block in the talks is how to find a sustainable path to Sri Lanka’s heavy debt, which stood at 114% of GDP at the end of last year, in order to reach a deal at the level of the staff in September. Read more

Sri Lanka has $9.6 billion in bilateral debt and its private credit, which includes international sovereign bonds, stands at $19.8 billion, according to finance ministry data.

Japan and China are the main holders of bilateral debt, the latter representing approximately $3.5 billion. Overall, if commercial debt is added, China holds about one-fifth of Sri Lanka’s debt portfolio.

“The question will be how Chinese debt and domestic debt will be included in the talks,” said Timothy Ash, senior sovereign emerging markets strategist at BlueBay Asset Management.

“Other bilateral creditors will not want to allow China to be denied comparable treatment this time around. China is part of the problem and must be part of the solution this time around.”

For months, the population of 22 million has battled runaway inflation, economic contraction and severe shortages of essential items of food, fuel and medicine caused by a record drop in foreign exchange reserves. Read more

The country’s worst financial crisis since independence from Britain in 1948 stems from the combined impact of the COVID-19 pandemic and economic mismanagement, sparking unprecedented protests.

In July, then-president Gotabaya Rajapaksa fled the country and resigned after a mass uprising sparked by what many Sri Lankans saw as his mishandling of the financial crisis. Read more

President Ranil Wickremesinghe, who is also finance minister, plans to ask Japan to lead bilateral debt restructuring talks after Sri Lanka secures IMF support. Read more

The government is “negotiating on many fronts, and it needs to make progress at least with the big creditors” for debt negotiations to move forward, said Sergi Lanau, deputy chief economist at the Institute of International Finance (IIF). .

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Reporting by Uditha Jayasinghe; Editing by Clarence Fernandez and Toby Chopra

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