SL averts immediate default; calls to engage IMF get louder

„Total package from India works out to US $ 2,415.2mn, including deferred debt „Economists say Indian assistance provides breathing space but cannot rest on laurels

„They want policymakers to negotiate with IMF, other creditors for a durable solution for debt

„Sri Lanka has another US $ 6.1bn in fx debt payments due for remainder of 2022

As Sri Lanka avoided an immediate debt default, averting a massive crisis, the country’s policymakers should now make use of the breathing space provided by the Indian credit lines to the tune of US $ 1.9 billion to engage with its creditors, preferably equipped with an International Monetary Fund (IMF) programme, to chart a durable and a sustainable path for foreign debt management, according to economists.

India last week confirmed a US $ 400 million swap line, under the SAARC currency swap arrangement and a deferral of A.C.U. settlement of US $ 515.2 million by two months, which would temporarily stop the country’s foreign reserves bleeding.

During the weekend, India announced the extension of further financial support with two bilateral funding lines—us $ 1.0 billion assigned for importation of food, essential items and medicines and US $ 500 million for importing fuel from India.

But all is not well with Sri Lanka’s external sector. Sri Lanka approximately has a US $ 1.6 billion monthly import bill and US $ 6.1 billion worth of foreign obligations to be settled during the remainder of 2022, including a billion dollar sovereign bond maturing in July.

As the path for the tourism industry that has a US $ 4.5 billion potential is still uncertain, with the direction of the pandemic, Sri Lankan policymakers will have to work harder to deal with the country’s external debt, which has bunched up till 2025.

Hence, the economists, who have long been advocating Sri Lankan policymakers since the onset of the pandemic to seek debt restructuring, have doubled down their efforts, as the Indian credit lines and debt deferment provide Sri Lanka a delayed opportunity to engage with its lenders to negotiate a durable and a less painful path for foreign debt and broader economic reforms.

“Now SL has 2 months of breathing time & must settle to hard econ(omic) reforms + honouring its promises to India to realise full gains; Should realise India can’t fully bailout SL; time to use space for negotiating with IMF for a permanent solution; Kudos to SL’S man in Delhi, @Milindamoragoda,” said former Central Bank Deputy Governor Dr. W.A. Wijewardena on Twitter, applauding Sri Lankan High Commissioner in India Milinda Moragoda, who brokered the deal.

Meanwhile, the Central Bank earlier said funds had been already allocated for the retirement of the US $ 500 million International Sovereign Bond (ISB) coming up for settlement today (January 18).

Leading up to the January ISB settlement, a section of economists was building up an alternative narrative to default the bond to save funds for the crucial imports, which are going out of supply, due to the worsening foreign exchange crunch.

They questioned the use of satisfying the men in Wall Street (majority of those who hold Lankan bonds) when your own country men and women were suffering in the main street, with soaring prices and commodities shortages.

However, that narrative was soon met with strong pushback from the Central Bank and those in the financial sector, as they stressed that a default would create unimaginable pain to the Sri Lankan economy along with an irreparable damage to the country’s reputation.