The offer to lend not a compulsion to borrow, says Verité chief

Dr. Nishan de Mel, Executive Director of Verité Research has urged the government to evaluate the “hidden costs” of the IMF’s Rapid Financing Instrument (RFI) before committing to the debt. 

While acknowledging the IMF approval as a positive signal for the economy, Dr. de Mel cautioned that the offer to lend should not be seen as a mandate to borrow. Invoking a traditional Sinhala adage, he noted that “no matter how it is given, it must be taken with wisdom,” emphasising that borrowing decisions must be grounded in professional cost-benefit analyses rather than knee-jerk reactions.

The economist highlighted that the effective interest rate of the RFI is significantly higher than the headline figures. He estimated that when factoring in SDR fluctuations, exchange rate changes, and IMF surcharges, the effective cost could exceed 6 percent in US dollar terms and over 11 percent in local currency. He specifically warned of the level-based surcharge of 2 percent applied when credit exceeds 300 percent of the country’s quota, which increases by a further 0.75 percent after three years for the remaining balance.

Dr. de Mel further argued that Sri Lanka faces no immediate liquidity constraint that necessitates rapid borrowing at these rates. He pointed out that the government already has access to approximately Rs. 30 billion from the 2025 budget for disaster relief, which accounts for half of the IMF’s total offer.

Suggesting more economical alternatives, he noted that domestic borrowing through three-year bonds at 9 percent remains cheaper than the 11 percent effective rupee cost of the IMF loan. He also proposed the possibility of scaling up funding via ESG-linked International Sovereign Bonds underwritten by multilateral banks to secure more favourable terms.