US$ 4bn IMF programme viewed as crucial to improve Sri Lanka’s debt sustainability

by Sanath Nanayakkare

An IMF exceptional lending programme worth US$ 4 billion – 500% of its current quota – could help Sri Lanka to have short term liquidity it needs to meet its debt obligations and shift to a more credible debt sustainability path, Murtaza Jafferjee, Advocata Institute Chairman and CEO, JB Securities, told The Island yesterday.

He made this comment responding to a query from The Island whether Fitch downgrade of Sri Lanka to CCC could have a significant impact on Sri Lanka’s image in the eyes of global fund managers and investors.

“After Sri Lanka’s sovereign rating was downgraded two notches to Caa1 by Moody’s in September 2020, it was only a matter of time that Fitch and S&P would follow suit. The latter two gave the benefit of the doubt to the government and waited for Budget 2021. Fitch would have taken into account the Budget proposals in making their evaluation to downgrade us to CCC which is a similar rating scale to Moody’s. I would expect S&P to follow suit in the very near future. So, Fitch’s downgrade was no surprise to the markets for it was expected”, the financial professional said.

When asked what Sri Lanka could do to raise external financing for its debt servicing under current circumstances, he said,” A rating is a quantified assessment of creditworthiness of a borrower which is mainly used by commercial creditors, bank lenders and financial market investors. At our current rating of Caa/CCC the government has lost access to capital markets and foreign commercial lenders such as banks, but it has not lost access to bilateral or multilateral creditors. However, these creditors would want to have the comfort of an IMF stamp on our debt sustainability.

“Debt Sustainability Analysis (DSA) is a probabilistic exercise that would plot potential pathways of debt metrics based on scenarios which are highly subjective to one’s assumptions. There can be significant deviations between the outcomes on such a model based on input of the government’s forecast for macro variables like growth, inflation and exchange rates as against forecasts by other agencies like the IMF, World Bank and ADB. Hence, it is unlikely that there will be an agreement between parties as to the potential pathways of our debt metrics”.

“In this context, my sense is that the only game in town is to go to the IMF for an Exceptional Access Lending Programme that can provide funds up to 500% of our current quota of US$ 800 million. This could be disbursed in one tranche, the limit of 150% of quota in anyone year under a normal programme, and these funds could yield an interest rate of 0.1%. Having said that, an IMF programme will be conditional that Sri Lanka reprofiles its external debt with its creditors by postponing principle and interest payments for a period of time to improve its Debt Sustainabilitythe Advocata Institute Chairman pointed out.