Government’s credibility hangs on IMF loan

The International Monetary Fund loan which was earlier expected to materialise in December 2022 will not be finalised until the Government finalises debt agreements with key lenders. The IMF reached staff-level agreement with Sri Lanka on a $ 2.9 billion package last September, but its executive board has not yet approved the loan. 

The Government of President Ranil Wickremesinghe built its legitimacy on the premise of being the only administration that could deliver a comprehensive economic recovery package, anchored on the IMF loan. Irrespective of these promises and claims there doesn’t seem to be a comprehensive debt restructuring agreement with all of Sri Lanka’s creditors.

The Central Bank announced in April 2022 that it would suspend all debt repayment until a negotiated restructuring with its creditors. After a 30-day grace period to pay $ 78 million expired in May with the Government unable to repay its lenders the country was officially in sovereign default or bankrupt in the eyes of the world. In total Sri Lanka is set to default on $ 12.6 billion of overseas bonds as the economy faces its worst crisis fuelled by a lack of foreign currency and surging inflation. 

Last year Hamilton Reserve Bank Ltd., an international bond holder that holds over $ 250 million of Sri Lanka’s International Sovereign Bonds sued the country in a United States’ Court. The company that is registered in the tax haven of Saint Kitts and Nevis filed the suit in a New York federal court seeking full payment of its principal and interest.

It is also reported that several of Sri Lanka’s creditors have now formed a group that will collectively negotiate debt restructuring with the Government. If the previous experiences of countries such as Argentina and Greece that faced sovereign defaults are to be considered these debt restructuring talks are going to be delicate, painful and complicated, requiring them to be handled with the highest degree of professionalism and competence. The creditors who are primarily private entities will not care about the state of the country or the wellbeing of its people when they negotiate a reasonable pay back scheme. Their interests will be primarily governed by the interests of their clients and the necessity to claim as much of the capital and due interest from Sri Lanka. 

As witnessed in Argentina these talks can take many years and sometimes leave governments having to prioritise repayment of debt over interests of citizens. Creditors who can inundate a government, especially a third world incompetent one such as Sri Lanka, with international litigation, will squeeze governments to part with their foreign currency even forgoing basic requirements such as food and medicines for its people. It is hoped that India and China, two of Sri Lanka’s most important bilateral lenders, would reach an agreement for restructuring debt without further delay.

None of the culprits that were responsible for the total economic meltdown ending in a sovereign default have been held accountable. Even worse is that there is not even a legal or administrative action initiated to find those responsible and hold them accountable. There is enough evidence to suggest that there is malpractice and criminality in the handling of the finances of the country.

The administration of President Wickremesinghe has its legitimacy and credibility hanging on its ability to secure a meaningful path towards recovery from the current economic crisis. The Government owes a duty to the electorate to keep them informed of the efforts taken and developments with regard to debt structuring.