COLOMBO: Sri Lanka’s new president took office with a mandate to bring relief to citizens still burdened by the remnants of the country’s worst-ever economic crisis. Now comes the hard part: Getting the lenders to play along.
Anura Kumara Dissanayake (pic) has vowed to reopen negotiations with the International Monetary Fund over a US$3 billion bailout to ease the burden on the poor following government spending cuts and tax hikes tied to the loan. Investors are worried that drawn out negotiations could delay payments or even threaten the loan program itself.
Also uncertain now are separate deals with Sri Lanka’s bondholders and creditor countries to restructure about $20 billion in debt after the nation defaulted for the first time ever in 2022.
But the new president may find it a challenge to alter anything but the fine print of the deals already in place, according to analysts, creditors and a former IMF official, given legislation locking in certain benchmarks set by the lending deal, and an eleventh-hour debt restructuring agreement between the previous government and the country’s private creditors.
"If both the IMF and bond deal are undone, it is not only bondholders that will lose, the Sri Lankan people risk unwinding some of the economic rebound that has been supported,” said Carmen Altenkirch, analyst at Aviva Investors Global Services Ltd.
In his first speech to the nation since taking office, Dissanayake on Wednesday (Sept 25) said he’ll seek immediate talks with the IMF because "we have to achieve stability.” He pledged to start discussions with creditors to expedite the debt restructuring.
That may signal minor changes in the IMF programme may be enough for the new president. He hasn’t detailed the specific modifications he wants, but he’s previously questioned some of the economic targets set under the IMF deal and called for stronger protections for the poor.
Sri Lanka’s dollar bonds continued their recovery from Monday’s selloff, with notes due March 2029 up a third day to 54.1 cents on the dollar on Thursday. The Sri Lankan rupee is steady after climbing almost 1% on Wednesday.
The IMF has said it is open to hearing alternate views over how its program should be implemented. Earlier this week, the lender said it looked forward to working with the new government and would soon discuss the timing of the loan package’s next review. Sri Lanka needs to clear certain fiscal targets agreed to with the IMF in order to release the next loan installment of about $350 million.
In an interview with local media last week, Dissanayake said he agreed with certain aspects of the IMF program, like reducing debt and maintaining a government primary surplus. He questioned whether a target of a 95% debt-to-GDP ratio by early next decade was sustainable, but said he was on board with targets for the country’s economy.
"Even if you leave the IMF aside, a country needs economic targets, so we do not have an argument about that,” he said.
One former IMF official not involved in the Sri Lanka loan program but who has extensive knowledge of the fund’s negotiations said any changes proposed by the new government would need to pass a debt sustainability test set by the lender. If Sri Lanka can’t show it can keep its debt on a sustainable path, then the loan program would need to be renegotiated, the person said.
As long as the new government puts forth policies that can meet the fiscal targets agreed to with the IMF, then alterations to the deal should be achievable, said Nishan de Mel, executive director of Verite Research, a Colombo-based think tank.
Dissanayake’s coalition is aiming "to redistribute the burden of tax collection,” he said. "This is not a significant problem for the IMF, provided you are coming up with realistic methods which are likely to succeed within the targets.”
The worry for investors is that the funding and debt restructuring deals will now face delays as the new president, a leftist political outsider, puts his team in place. He’s focusing on boosting his support in parliament - his bloc held just three of the 225 seats - and has called this week for an early legislative election to be held Nov 14.
Any radical rewrite of the IMF deal is likely to require a strong parliamentary backing. Certain IMF fiscal targets were passed into law in May in a bill spearheaded by Ranil Wickremesinghe, the previous president who negotiated the bailout.
The so-called Economic Transformation Act bounds future governments to adhere to certain fiscal targets including Sri Lanka’s debt-to-GDP ratio.
More challenging for Dissanayake’s government could be any attempt to renegotiate with the country’s creditors. Just two days before Saturday’s vote, Wickremesinghe’s government and a consortium of private creditors announced a deal to restructure some $12.6 billion in debt, a key step in getting in the country out of bankruptcy.
Investors say any attempt to rewrite that deal could provoke a backlash from creditors that risks the country’s broader restructuring.
"It would make very little sense for an incoming government to start from the beginning again,” said Altenkirch. "Going back to the drawing board risks investors playing hard ball.” - Bloomberg
