Photographer: Kuni Takahashi/Bloomberg

Sri Lanka Secures $1.5 Billion IMF Loan to Help Bolster Finances

  • Nation agrees to narrow deficit with more tax revenues
  • Sri Lanka also seeking to sell $3 billion of global bonds

Sri Lanka reached an agreement with the International Monetary Fund for $1.5 billion in loans to help lower its borrowing costs and fix its finances.

The South Asian nation has pledged to narrow its fiscal deficit to 3.5 percent of gross domestic product by 2020 through “a comprehensive set of reforms to Sri Lanka’s tax system,” the Washington-based lender said in a statement. The budget gap widened to 7.4 percent of GDP in 2015 from 5.7 percent a year earlier, according to the central bank.

The loan “is a dose of confidence that Sri Lanka is trying to create a clearly defined road map going forward," central bank Governor Arjuna Mahendran said by phone on Friday morning. “It will help with messaging to financial markets our targets and intentions."

The loan program will need approval by the IMF’s executive board, which is due to consider it in early June. Once approved, it’s “expected to catalyze an additional $650 million in other multilateral and bilateral loans, bringing total support to about $2.2 billion, over and above existing financing arrangements,” the IMF said.

Debt Sales

Sri Lanka is facing refinancing concerns that prompted Fitch Ratings to downgrade the nation’s debt. The nation last sought IMF help in 2009 to bolster its international reserves following the end of a three-decade old civil war, and received the final tranche of a $2.6 billion loan in 2012.  

The loan package “will provide external liquidity to ease immediate financing pressures,” Marie Diron, senior vice president, sovereign risk group at Moody’s Investors Service, said in an e-mail Friday. “It could reverse the decline in official foreign-exchange reserves and reduce Sri Lanka’s vulnerability to a sudden stop in capital inflows.”

IMF funds will also likely be “at more favorable terms than Sri Lanka can avail of through the market, which alleviates debt servicing cost pressures,” Diron said.

While Sri Lanka plans to tap the market for funds, it needs to stay disciplined due to its high debt-to-GDP ratio, Mahendran said. The nation is looking to roll over short-term debt into cheaper long-term notes, he said.

‘Independent Referee’

The IMF “is like an independent referee," Mahendran said.

The rupee was little changed at 146.05 per dollar as of 9:45 a.m. in Colombo. The currency reached a record low in March after worsening foreign-exchange reserves and balance of payments forced the central bank to stop propping up the currency.  

“This will be a sentiment booster and help stabilize the rupee and win international investor confidence,” Bimanee Meepagala, Colombo-based fund manager at NDB Wealth Management Ltd., said by phone. “The government might find it challenging though to push the reform drive for fiscal consolidation.”

Prime Minister Ranil Wickremesinghe in March announced a plan to boost revenue by as much as 0.5 percent of gross domestic product, citing a “mountain” of hidden debt left by the previous government. Wickremesinghe took power after an election last year that ended the decade-long rule of former leader Mahinda Rajapaksa.

Sri Lankan Airlines

The IMF said his government pledged a number of reforms, including limiting support for state-owned companies and making subsidies for the poor more targeted. The central bank will also move to a flexible inflation-targeting program, it said.
 
“The government is committed to dealing quickly with the legacy of Sri Lankan Airlines, which continues to represent a drain on public finances after years of mismanagement,” the IMF said. Going forward, key state firms will be governed transparently by annually published statements of corporate plans, it said. 

Sri Lanka also plans to sell as much as $3 billion of bonds in international markets this year to help bolster its finances. Mahendran said last month the island nation will tap other sources like the World Bank, Asian Development Bank as well as lenders from Japan and Korea once the IMF gives its endorsement.

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