IMF in talks with Sri Lanka on credit facility

The International Monetary Fund reported on Thursday that it was in talks with the Sri Lankan authorities on 30 June, and hopes it will grant preliminary approval for a credit facility to alleviate a crisis in which the country is struggling to pay for imports.

The discussions will be conducted virtually with a view to reaching a staff-level agreement on the EFF arrangement in the near term, according to the credit arrangement, an extended fund facility, according to the International Monetary Fund.

A staff-level agreement must precede final approval by the IMF's executive board, but there must also be cooperation from Sri Lanka's creditors, which is not expected to happen quickly.

Since public debt is assessed as unsustainable, Executive Board approval would need adequate financing assurances from Sri Lanka's creditors to restore debt sustainability, the International Monetary Fund said.

The International Monetary Fund statement said that the sovereign dollar bonds issued by Sri Lanka fell by as much as 1.8 cents. The 2025 bond took a huge tumble and was at a new record low of just over 34 cents in the dollar, according to Tradeweb data.

Even after the IMF staff-level agreement, analysts say debt restructuring will be a long process.

With little money available for imports, the country has dangerously low fuel reserves. For two weeks the government has restricted allocations to essential services, such as trains, buses and the health sector.

The high fiscal deficit had to be reduced while the protection for the poor and vulnerable was provided by the International Monetary Fund. Tax reforms were needed to achieve these objectives because revenue was weak.

The statement indicates staff-level agreement will come in very soon and could activate bilateral and multilateral lenders to look at Sri Lanka positively, said Udeeshan Jonas, chief strategist at equity research firm CAL.

IMF support will help Sri Lanka get commitments from creditors. He said that the government has made a lot of progress on things that are generally supposed to be in favor of an IMF staff level agreement.

Other challenges that needed to be addressed included containing rising inflation, attending to severe balance of payments pressures, reducing the country's vulnerability to corruption and undertaking growth-enhancing reforms.