Talks between crisis-hit Sri Lanka and the International Monetary Fund will continue as they aim to reach a ‘short-term’ staffing deal

COLOMBO, Sri Lanka — The International Monetary Fund (IMF) said its talks with crisis-hit Sri Lanka were “constructive” on Thursday, June 30, raising hopes it will soon give preliminary approval to a program desperately needed financial support.

Sri Lanka had to close schools and stop providing fuel to all but essential services this week after years of economic mismanagement that saw it run out of money.

“Discussions will continue virtually with a view to reaching a staff-level agreement on the Expanded Financing Facility arrangement in the short term,” the IMF said after 10 days of talks with Sri Lankan officials.

A staff agreement is a key step in agreements with the IMF. To be finalized, the agreement must be approved by the Executive Board of the IMF, but more importantly for the process, it defines the measures that governments must take in return.

“Because public debt is assessed as unsustainable, Executive Board approval would require adequate financing assurances from Sri Lanka’s creditors that debt sustainability will be restored,” the IMF said.

These assurances are likely to be very sensitive in Sri Lanka.

Protests, some of them violent, in recent months have forced a number of key ministers to resign, leaving President Gotabaya Rajapaksa and Prime Minister Ranil Wickremesinghe struggling to stabilize the nation.

The country also owes China and other countries at least $3.5 billion, and the global investment funds that have also lent Colombo tens of billions want assurances that any debt relief that they will provide will be matched by Beijing.

Sri Lanka’s international government bonds, which are already in default, fell 4.3 cents after the IMF statement. The 2025 bond suffered the biggest drop and hit a new all-time high at 32 cents on the dollar, or one-third of its face value.

“It’s positive that we saw this statement from the IMF so quickly,” said Lutz Roehmeyer, bondholder at Capitulum Asset Management in Berlin. “The sooner we get an agreement…the sooner financial aid can get to the country.”

Analysts have warned that Sri Lanka’s debt restructuring is still likely to be a protracted process.

The financial crisis is the worst in decades for the island of 22 million people, which has little money to pay for basic necessities like food and fuel.

The IMF said in its post-meeting reading that the high fiscal deficit needed to be reduced while providing adequate protection for the poor and vulnerable. With revenues low, far-reaching tax reforms were urgently needed to achieve these goals, he added.

“The statement indicates that a staff-level agreement will come very soon and could encourage bilateral and multilateral lenders to view Sri Lanka positively,” said Udeeshan Jonas, chief strategist at equity research firm CAL. .

“IMF support will help Sri Lanka secure commitments from creditors. The government has made a lot of progress on things that are generally supposed to be supportive of an IMF staff-level deal,” he added.

The IMF said other challenges include containing rising inflation, managing severe pressures on the balance of payments, reducing the country’s vulnerability to corruption and implementing reforms. conducive to growth.

“The fuel shortage, a jump in inflation to 55% and the central bank’s money printing show that the economy will be in the worst position for a debt restructuring, which partly explains the fall in the bond prices,” said Patrick Curran, senior economist at Tellimer. – Rappler.com