Nishan de Mel urges Sri Lanka to reject IMF RFI

• Renews warning funding loan could prove costly
• Before 2022 default, Dr. de Mel red-flagged CBSL decision to settle $ 500 m Bond, urging CBSL to hold onto reserves for essentials 
• Claims warning went unheeded and SL defaulted in April 2022 worse off, with about $ 250 m in reserves

Verité Research Executive Director Dr. Nishan de Mel yesterday reiterated his warning that accepting the International Monetary Fund’s (IMF) proposed $ 206 million Rapid Financing Instrument (RFI) to address post-Ditwah recovery could impose a high effective cost on Sri Lanka.

“The IMF has sent a positive signal by approving an RFI for Sri Lanka, and it provides options. But the decision to accept it should be taken with full awareness of the costs and a proper evaluation of alternatives,” Dr. de Mel said in a post on ‘X.’

Last week, Dr. de Mel warned that the effective cost of IMF RFI financing could exceed 6% in US dollar terms and rise above 11% in rupee terms once exchange rate effects and Special Drawing Rights (SDR)-linked charges are factored in. He also pointed to IMF time-based surcharges, which add a further 2.75% after three years, significantly increasing the long-term cost of such borrowing.

Dr. de Mel’s caution echoes his stance ahead of Sri Lanka’s 2022 default, when he criticised the Central Bank of Sri Lanka’s (CBSL) decision to settle a $ 500 million international Bond maturing in January 2022. At the time, then CBSL Governor Ajith Nivard Cabraal argued the payment would send a positive signal to markets, but Dr. de Mel warned it would merely delay an inevitable default while draining scarce foreign reserves. 

He argued that, with ratings already deeply distressed, the marginal damage from further downgrades would be limited, whereas running down reserves would inflict greater harm on the economy, including shortages of essential imports such as medicines.

The then Government went ahead and settled the $ 500 million Bond, and defaulted in a worse-off position. 

Dr. de Mel is now warning against increasing the debt burden further.

He noted that domestic rupee borrowing at current three-year Treasury Bond yields of around 9% would be cheaper than the effective rupee cost of the IMF RFI loan, while domestic US dollar borrowing could also offer a lower-cost option.

As an alternative, Verité proposed issuing a Domestic US dollar Bond dedicated to cyclone recovery, potentially via a yield-capped second-price auction. Dr. de Mel said Sri Lankans, including the diaspora, are already placing US dollars with local banks at rates of about 5%, indicating available appetite at lower yields. 

He also suggested exploring an Environmental, Social and Governance (ESG)-linked International Sovereign Bond (ISB) tied to cyclone recovery performance indicators and underwritten by a multilateral development bank to reduce borrowing costs.

Dr. de Mel proposed seeking disaster recovery grants of around 1% of GDP, or approximately $ 1 billion, from multilateral development banks and bilateral partners instead of adding to the debt stock. He also called for legal adjustments to expand spending space, suggesting Parliament move a resolution under Section 16 of the Public Finance Management Act of 2024 to temporarily lift the 13% of GDP ceiling on primary expenditure in 2026 to accommodate cyclone-related recovery.

“There is no immediate liquidity constraint, and recovery spending will take time,” Dr. de Mel said, stressing that evaluation-based debt management decisions were essential to avoid repeating past errors.

However, the IMF in a statement on Friday and the Government argued separately that the RFI is essential to avoid Balance of Payments pressures due to a Rs. 700 billion injection for the post-Ditwah recovery comprising Rs. 500 billion via a supplementary estimate and Rs. 200 billion diverted from capital expenditure, according to President Anura Kumara Dissanayake’s comments to Parliament on Friday.