COLOMBO
Dollar-strapped Sri Lanka is pinning its hopes on a still-elusive $2.9 billion International Monetary Fund bailout before it starts rebuilding its usable foreign reserves, the head of the country’s central bank told Nikkei Asia in a recent exclusive interview.
“Once the IMF starts disbursing their commitments following the IMF board’s approval, it will be the point at which we will start building our foreign reserves,” Gov. Nandalal Weerasinghe said.
The bankrupt South Asian nation reached a staff-level bailout agreement with the IMF in early September, subject to board approval. But Sri Lankans will soon be welcoming a new year amid continued economic hardship. For now, limited imports are being paid for with export earnings, remittances from migrant workers and a trickle from the tourism sector as the authorities cling to paltry remaining funds.
Usable coffers slumped to historic lows of $20 million by April and have now inched up to $300 million. Officially, reserves hover at $1.7 billion, but this includes a $1.4 billion swap from the People’s Bank of China that cannot be tapped because of restrictive conditions. For example, Sri Lanka would have to save up reserves to finance three months of imports, an estimated $5.1 billion, before China’s central bank approves access.
The two-step approach to restoring the reserves is part of the recovery program Sri Lanka is pursuing with the IMF’s blessings, said Weerasinghe, 61, a veteran central banker who was called out of retirement in April. “The gradual buildup of reserves is one of the key objectives of the IMF program going forward,” he said.
Until the IMF money starts flowing, he added, “we will not get any external financing from anyone.”
Crossing that threshold, however, depends on the island nation’s largest foreign bilateral creditors — China, Japan and India. Colombo has been forced to plead with them for restructuring after the government of former President Gotabaya Rajapaksa confirmed in May that Sri Lanka had run out of dollars to pay its foreign lenders, precipitating its first sovereign default since independence from the U.K. in 1948.
Well-placed government sources say President Ranil Wickremesinghe’s administration is focused on securing “creditor assurances” in behind-the-scenes talks with these lenders. Wickremesinghe, who doubles as the finance minister, was chosen by the Sri Lankan parliament to finish Rajapaksa’s term after the latter fled the presidential palace in July in the wake of unprecedented public rage triggered by scarcities of food, fuel and pharmaceuticals in the import-dependent country.
At the end of 2021, as the economic crisis began to bite, total external debt stood at $47 billion in what was an $81 billion economy. China accounts for 52% of the total bilateral debt, followed by Japan at 19.5% and India at 12%, according to Sri Lanka’s Finance Ministry.
The largest lenders are private creditors, holding $13 billion in international sovereign bonds. They include asset manager BlackRock.
Weerasinghe said the negotiations, which he is privy to, are making “good progress” and “heading in the right direction.” But he sought to temper expectations — rising since the IMF and Sri Lanka reached the staff-level agreement — that the creditor assurances will be obtained by December.
“December may not be so, but maybe in January,” said the Australian-trained econ
IMF officials at the multilateral lender’s headquarters in Washington are receptive to the shifting timeline. “It is difficult to predict how long the discussions with the creditors will take,” Peter Breuer, senior mission chief for Sri Lanka, and Masahiro Nozaki, mission chief for Sri Lanka, told Nikkei Asia in written remarks. But once Sri Lanka meets the preconditions to qualify for the bailout, “the Executive Board meeting will be arranged as soon as possible.”Sri Lanka’s economy is expected to contract by 9.2% this year and 4.2% in 2023, according to the World Bank.
Seasoned analysts had forecast a dire turn as the foreign reserves Rajapaksa inherited after his November 2019 electoral landslide — nearly $7.6 billion — plummeted. Sri Lanka quickly came to be regarded as the “worst case” among nations in a Global South saddled with unsustainable foreign debts. Zambia had reserves of $1.2 billion to cover two months of imports when it defaulted in 2020, while Ecuador had $2 billion in reserves to cover one and a half months of imports when it defaulted the same year.
“So you see how terribly, shockingly and criminally incompetent [Sri Lankan officials] were,” a London-based emerging markets investor told Nikkei. “No country runs out of money, but Sri Lanka burnt all its cash, knowing it will not have money for food.”
This is the mess that Weerasinghe faced when he took over from Nivard Cabraal, his predecessor as the central bank governor. Cabraal told Nikkei in a February interview that his primary interest was to stay in the good books of the country’s foreign bond holders by dipping into the dwindling dollar reserves to pay them. “We are having their interest at heart,” he said at the time.
When the money dried up and Sri Lanka defaulted, the country, which had sought IMF bailouts 16 times before, found itself in uncharted waters — restructuring foreign debts with external lenders.
“This is new for us because we have never had to restructure our external obligations,” Weerasinghe said. “We are learning how to do it and having to understand the areas of concerns raised by our creditors.” That list includes queries about the path for restoring foreign reserves, the fiscal consolidation plan, structural reforms to boost growth, and inflation targets.
“We don’t want Sri Lanka to end up like Argentina — going back again and again to the IMF after sovereign defaults,” Weerasinghe said. (NIKKEI Asia)
