(Bloomberg) — The International Monetary Fund has granted initial funding approval to Sri Lanka, clearing the path for the South Asian nation to receive the next installment from a $3 billion bailout program.
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Before Sri Lanka can receive the next payment of approximately $330 million, a staff-level agreement on economic policies must be endorsed by the IMF’s Executive Board, the Washington-based lender announced on Thursday. It emphasized the importance of reaching a deal with official lenders to restructure the loan.
“The economy is displaying initial signs of stabilization as a result of macroeconomic policy reforms,” stated the IMF. It highlighted the need to address issues of governance and corruption to establish a sustainable recovery path for the economy.
Sri Lanka’s progress in debt restructuring is also crucial for IMF financing. The country recently completed a domestic debt swap. A group of official creditors from India, Japan, and France is expected to submit a debt restructuring proposal “very soon,” according to an informed source.
In addition, a proposal for debt restructuring was put forward by a group of dollar bondholders, although it was not favorably received by Sri Lanka. Following a recent temporary agreement with the Export-Import Bank of China, President Xi Jinping assured President Ranil Wickremesinghe in a meeting in Beijing on Friday that China will continue to assist Sri Lanka without any political ties, as reported by Xinhua news agency.
Sri Lanka’s dollar bonds have risen approximately 66% this year due to optimism surrounding its fiscal recovery under the IMF bailout. On Friday, the 2030 notes remained stable at around 49 cents on the dollar after falling 2 cents on Thursday following a government statement expressing serious concerns about the bondholder proposal. The benchmark Colombo All Share Index experienced its highest increase since July, climbing 2.5%.
Sri Lanka has implemented measures to enhance tax revenues, and inflation has decreased from nearly 50% in March to 1.3% in September as the country pursues reforms after defaulting on its debt last year. The IMF emphasized the need for Sri Lanka to rebuild its foreign exchange reserves to strengthen its buffers.
Distressed debt market investors are closely monitoring Sri Lanka’s restructuring efforts as they evaluate which country will recover most rapidly from its crisis. While Zambia’s restructuring is planned over a span of three years, Sri Lanka aims to reach an agreement by the end of 2023 after defaulting in May of the previous year.
“Securing financial assurances has become quicker,” stated Peter Breuer, the IMF’s senior mission chief for Sri Lanka, during a briefing on Friday. “Sri Lanka’s progress has been faster compared to Zambia and Chad, while Ghana has been the swiftest.”
–With assistance from Matthew Hill.
(Updates pricing, adds background and IMF commentary)
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Source: ca.finance.yahoo.com
