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Sri Lanka Debt Deal: Renegotiation Risks IMF Bailout

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By Rediff Money Desk, Colombo   Aug 29, 2024 16:35

Sri Lanka's foreign minister warns renegotiating debt terms could jeopardise IMF bailout, impacting World Bank and ADB funding. Economic instability is a risk.
Sri Lanka Debt Deal: Renegotiation Risks IMF Bailout
Photograph: Dinuka Liyanawatte/Reuters
Colombo, Aug 29 (PTI) Warning against any attempts to renegotiate Sri Lanka's Debt Sustainability Agreement, Foreign Minister Ali Sabry has said resuming negotiations with the IMF could jeopardise its next tranche due in December and subsequent disbursements from the World Bank and the Asian Development Bank.

The conditions for the Debt Sustainability Agreement (DSA) have now become part of the law and cannot be easily altered, Sabry said. He emphasised that renegotiating the deal could lead to further economic instability in the island nation, which is recovering from the worst-ever economic turmoil it suffered in 2022.

Sri Lanka declared its first-ever sovereign default in mid-April 2022, having run out of its foreign exchange reserves. The halt to the debt services meant that the multilateral creditor nations and commercial lenders could not extend fresh financing to the country.

In July, the Sri Lankan government reached a debt restructuring deal with international sovereign bondholders after protracted negotiations with countries like China, India, France and Japan.

Addressing a news conference on the ‘Two Years of Progress and Advancement' at the Presidential Media Centre on Wednesday, Sabry detailed the stringent parameters of the DSA and emphasised that renegotiating with the International Monetary Fund (IMF) is a very serious and unsuccessful endeavour.

Sri Lanka is currently in negotiations with the IMF, which has made external debt restructuring conditional to the USD 2.9 billion bailout package.

The third tranche of the bailout package was released in mid-June as the Washington-headquartered global lender said on August 2 that Sri Lanka's economic reform programme has yielded good results.

The development came two years after the island nation declared sovereign default in mid-April of 2022, its first ever since gaining independence from Britain in 1948.

Sabry said the DSA parameters include reducing the current debt from 133 per cent to 95 per cent, lowering the GDP percentage allocated for foreign loan settlements from 9.3 per cent to 4.5 per cent, achieving a 2.1 per cent surplus on the primary balance, and ensuring that 15 per cent of the GDP comes from tax revenue.

A statement from the President's Media Division said that the Minister highlighted that resuming negotiations with the IMF could jeopardise the next tranche due in December, as well as subsequent disbursements from the World Bank (WB) and the Asian Development Bank (ADB).

“If you try to renegotiate and change it, it will take another year. If that happens, the IMF will not give their next tranche of USD 400 million in December. If they don't give, the World Bank will not give their next tranche of USD 400 million. And if they don't give, ADB will not give their next tranche of USD 500 million,” Sabry explained.

As a result, between December 2024 and January 2025, the country could lose between USD 1.2 billion to 1.3 billion, which could lead to further instability, he warned.

He warned that without this funding, the country could face severe economic instability, including a tumbling rupee and rising inflation.

Ahead of the September 21 Presidential polls, some opposition leaders have been harping on renegotiating terms of the IMF.
Source: PTI
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