Fitch Ratings believes Sri Lanka is likely to secure financing support from the IMF after the fund’s Executive Board set a date of 20 March to review the USD2.9 billion staff-level agreement that the country signed with the IMF in September 2022. Although IMF funding should improve Sri Lanka’s external liquidity, the timing of any debt restructuring agreement with official and private creditors remains uncertain which could drag on for a long time.
“Nonetheless, potential upsides to Sri Lanka’s economic outlook will remain constrained until its debt restructuring is agreed upon. The prospects for a deal with creditors remain unclear for now. We view recent developments as positive for debt negotiations, partly because they suggest that official creditors’ financing assurances are consistent with the parameters of the IMF’s program that seeks to return debt to sustainable levels. However, restructuring talks could continue for a long time yet,” the Rating Agency stated.
Fitch noted that debt restructuring talks with private creditors (bondholders) could drag on..
“The example of Zambia (Restricted Default, or RD), where an IMF support package was approved by the Board in August 2022 but debt restructuring talks are still ongoing, highlights this risk. We believe that even if official creditors are more aligned in Sri Lanka’s case, talks with private-sector creditors could raise further complications,” it pointed out.
IMF Executive Board approval of the program is set to release IMF funding and should unlock additional financing from multilateral creditors. This would bolster official foreign-exchange reserves, which have already risen 30% from their trough in October 2022. Nonetheless, reserves remain very low, at USD2.2 billion in February, equivalent to around one month of imports.
Fitch expects improved external liquidity to support a broader strengthening of macroeconomic stability. The exchange rate has appreciated since late February 2023. Month-on-month inflation had already moderated over 2H22, but the strengthening of the currency should further restrain price growth if it is sustained.