IMF says Sri Lanka needs to restore debt sustainability to secure fund's support

The island nation is battling its worst economic crisis since its independence in 1948

Sri Lanka needs $4 billion over the next eight months to pay for imports as it faces a severe shortage of foreign currency required to buy essentials such as fuel and medicine. AP Photo

Sri Lanka's government needs to provide assurances about its debt sustainability to secure any kind of support from the International Monetary Fund, the Washington-based lender said following a staff visit to the country, which is battling its worst economic crisis since its independence in 1948.

The fund said it welcomed the appointment of financial and legal advisers to engage in discussions with the country's creditors but called Sri Lanka's debt “unsustainable”.

“IMF staff will continue to monitor the economic and political situation very closely and engage with the authorities to formulate concrete measures under an IMF-supported programme, as well as broader stakeholders to support a timely resolution of the crisis,” the lender said on Thursday.

“The IMF team held technical discussions on a comprehensive reform package to restore macroeconomic stability and debt sustainability.

“The discussions focused on restoring fiscal sustainability while protecting the vulnerable and poor; ensuring credibility of the monetary policy and exchange rate regimes; preserving financial sector stability; and structural reforms to enhance growth and strengthen governance.”

The fund, however, did not commit any loans to help the bankrupt country.

Sri Lanka needs $4 billion over the next eight months to pay for imports as it faces a severe shortage of foreign currency required to buy essentials such as fuel and medicine.

The island nation of 22 million people has fallen into default for the first time in its history after the expiry of a 30-day grace period for missed interest payments on two of its sovereign bonds.

Sri Lanka's headline inflation is also expected to worsen to 40 per cent over the next few months, further deepening its economic woes.

“Sri Lanka is facing difficult economic conditions and severe balance of payments problems. Recent economic indicators suggest that economic activities have been negatively affected by fuel and power shortages,” the IMF said.

“Rising global food and oil prices have further added to the balance of payments pressures. Inflation has accelerated driven by many factors, including the shortages of goods, fuel price increases and currency depreciation.”

Sri Lanka has been seeking funding support from international organisations such as the IMF and the World Bank to ride out the crisis but is yet to secure any commitments.

The World Bank said it does not plan to offer new financing to Sri Lanka “until an adequate macroeconomic policy framework is in place”.

On Tuesday, Prime Minister Ranil Wickremesinghe was given dual charge as the finance minister in an effort to speed up talks with Sri Lanka's partners and lenders to help ease the ongoing crisis.

Mr Wickremesinghe has held talks with foreign envoys, including those from India, China and the US, and discussed with representatives from the Asian Development Bank and World Bank ways to replenish food, fertiliser and medicine supplies.

The country is aiming to secure an IMF loan by mid-June this year, a step that could help the government start debt restructuring talks with China, which is one of its creditors, Mr Wickremesinghe said during an interview with Bloomberg.