Finance Ministry says straying from IMF debt plan could delay bailout

By Bandula Sirimanna

The Finance Ministry has issued a strong warning about the significant risks associated with challenging the country's current debt sustainability assessment (DSA). Such actions could endanger Sri Lanka's ongoing International Monetary Fund (IMF) bailout programme, potentially delaying vital financial support for months or even years.

In a detailed statement, the Ministry emphasised the critical need to adhere to the IMF's established debt framework.

The IMF mandates that countries seeking financial aid must demonstrate sustainable debt levels. If Sri Lanka's debt is deemed unsustainable, the IMF will not be able to proceed with the bailout.

This underscores the importance of aligning the country's debt restructuring efforts with the IMF's guidelines to secure the necessary relief and meet debt targets.

Sri Lanka has made notable progress under the current IMF programme, but the road to recovery is still precarious. According to IMF Senior Mission Chief Peter Breuer, continuing with reforms aimed at fostering stable and inclusive economic growth is essential to avoid a return to crisis.

A key challenge remains achieving the primary fiscal balance—excluding interest payments—required to restore debt sustainability. From 2025 onwards, this balance must reach at least 2-3 per cent of GDP, based on realistic budget assumptions, he added.

However, some economic experts, including a former Treasury Secretary who wished to remain anonymous, have criticised the IMF’s debt sustainability analysis (DSA) methodology.

They argue that the estimated reduction in external debt is insufficient and that domestic debt restructuring unfairly burdens the working population by imposing losses on pension funds, which hold sovereign debt.

These experts contend that the focus should be on reducing foreign exchange-denominated debt, as the current approach may not deliver the necessary relief.

Recent media reports indicated that Sri Lanka did not devise its own DSA during debt restructuring negotiations.

The Finance Ministry responded by clarifying that while Sri Lanka has made amendments to IMF agreements in the past, the current situation is different due to the central role of debt restructuring in the ongoing IMF-supported economic reform programme.

Sri Lanka is now part of the IMF’s Market Access Sovereign Risk and Debt Sustainability Framework (MAC SRDSF), a model that assesses debt sustainability for middle-income countries. This framework is rigid, with debt targets that can only be adjusted under significant changes in circumstances.

Sri Lanka has developed its own internal DSA, with the assistance of debt advisors, to inform its negotiating strategy during talks. However, the IMF’s DSA remains the independent benchmark to ensure that any agreements with creditors meet the required debt relief targets.

The Ministry has warned that opposing the IMF’s DSA could lead to severe delays in securing financial support, which would be disastrous for Sri Lanka's fragile economy. The Ministry advocates for a pragmatic approach, emphasising the importance of timely action to protect the nation’s economic future.