IMF programme “more likely than not” as external liquidity conditions continue to tighten: FCR

• Says external funding becoming more difficult with global CBs turning hawkish
• Estimates SL’s external debt obligations in next 12 months at US $ 7bn

Seeking an International Monetary Fund (IMF) assistance to ride out the external sector and broader economic woes of Sri Lanka is increasingly becoming the most plausible scenario, as access to external funding is becoming more difficult with the global central banks turning hawkish, changing the direction of global capital flows, according to First Capital Research (FCR).

Sri Lanka is currently facing its most acute shortage of external sector liquidity, spilling over into the broader economy by way of higher prices and food shortages amid loss of incomes caused by continuous disruptions into the country’s key foreign exchange earnings such as tourism, direct investments and exports.  The situation was further exacerbated by the foreign currency debt obligations, which have been remaining an overhang on the economy for years, requiring US $ 4.0 to US $ 4.5 billion per annum on average in the next five years. 

While these economic woes aren’t a recent phenomenon, the pandemic-triggered disruptions exposed the country’s vulnerability in the face of prolonged crises.  “As predicted, an IMF programme is now more likely than not,” said Dimantha Mathew, Head of Research at FCR and the author of their mid-year outlook report released last week. Mathew’s expectation is that the authorities would start negotiations for a programme with the multilateral lender as early as this quarter. 

“Though there are rumours of negotiations, so far such a programme has not materialised but the government has obtained the rapid funding facility of US $ 787 million from the IMF,” he said in reference to the country’s quota allocation of Special Drawing Rights created by the IMF a fortnight ago.

FCR estimated the country’s foreign currency debt obligations falling due during the next 12 months at US $ 7.0 billion, consisting of both principal repayment and interest. 

Mathew is of the view that this is a tall order for the country, with its already depleted foreign exchange reserves and its inability to return to the international capital markets for debt roll over, with risks of further sovereign rating downgrades.  A more recent development, which could further weigh on attracting foreign capital, is the beginning of the shift in foreign capital flows towards the developed markets, due to the rising interest rates or signals of the beginning of monetary tightening there. 

“Central banks around the world make hawkish turns reverting funds to developed markets. Rate hikes by a number of central banks and possible tapering in the US are expected to shift the fund flow towards the developed markets while raising capital or debt is going to be challenging for countries like Sri Lanka,” Mathew added. 

According to economists and analysts, a programme with the IMF would restore Sri Lanka’s access to foreign debt capital markets as the engagement provides the reassurance to both potential global investors and the credit rating agencies that the economy would stay on course to crucial structural reforms while narrowing the budget gap, the fund’s key concern. However, the success of such an agreement would largely depend on how favourably the government could negotiate the terms with the IMF, with minimal impact on business and consumer sentiments, economic growth and its own political survival.  The previous government failed to meet this trifecta, with its botched engagement with the IMF and paid a heavier price at the ballot box.