IMF Says Sri Lanka’s Debt Sustainability Still at Risk Amid Global Pressures
International Monetary Fund Mission Chief for Sri Lanka, Evan Papageorgiou, has stated that Sri Lanka’s debt sustainability remains vulnerable, while also noting that the recent depreciation of the Sri Lankan Rupee was mainly caused by the ongoing conflicts in the Middle East and the resulting increase in global oil and commodity prices. He further said that Sri Lankan authorities have already taken suitable temporary measures to stabilize the situation.
The IMF Executive Board approved the 5th and 6th reviews of Sri Lanka’s Extended Fund Facility (EFF) programme on Wednesday (27), enabling the release of an additional USD 695 million to Sri Lanka. Following the approval, the IMF held a special virtual media briefing yesterday at 6.00 p.m. Sri Lanka time to explain its assessment of the country’s current economic situation.
Responding to questions raised by journalists, IMF Mission Chief Evan Papageorgiou highlighted the following key points:
Economy in a Comparatively Strong Position
The approval of the 5th and 6th reviews under the Extended Fund Facility programme marks a very important milestone for Sri Lanka. Despite the numerous challenges faced in recent years, the implementation of the programme has remained strong. Compared to the severe economic crisis experienced in 2022, the country is now in a much more stable and improved position. Sri Lanka’s economic growth for this year is projected at 3 percent.
Due to the intensified conflicts in the Middle East region, inflation has increased recently. Therefore, the Central Bank has tightened monetary policy in order to control inflation and maintain price stability. According to the IMF, this is an appropriate response to manage the impact on the value of the Rupee during periods of external pressure.
Temporary Relief Measures by the Government
The IMF also discussed with Sri Lankan authorities the temporary relief measures currently being provided by the government in response to the present economic conditions. Since these are temporary measures, the IMF expects them to conclude by September this year.
Rupee Depreciation Considered Natural
Papageorgiou explained that the recent decline in the value of the Sri Lankan Rupee was mainly due to the ongoing Middle East conflict and the resulting rise in global prices of oil and other commodities. In such a situation, a depreciation of the currency is considered a natural development. He noted that the entire global economy has been affected by the Middle East crisis, and Sri Lankan authorities have taken appropriate temporary actions to address the resulting pressure on the Rupee.
Debt Sustainability Still Challenging
Regarding Sri Lanka’s debt situation, he pointed out that the country had accumulated very high levels of debt over recent years. However, several restructuring measures, including the debt restructuring process which is nearing completion, have significantly improved the country’s debt outlook. Nevertheless, debt sustainability still remains under threat.
IMF Does Not Recommend More Import Restrictions
The IMF also stated that during its recent visit to Sri Lanka, extensive discussions were held regarding the import restrictions imposed by the government. According to the IMF, long-term economic recovery cannot be achieved through import restrictions alone. Therefore, the organization does not recommend introducing new import restrictions or expanding existing ones.
No Discussion on a New IMF Programme
Papageorgiou further stated that there have been no discussions regarding a new IMF programme for Sri Lanka at this stage. The current priority is to successfully complete the programme already in operation. He added that Sri Lanka has achieved considerable economic progress during the past three and a half years under the current programme, and those gains should continue moving forward.
