Local debt restructuring: IMF stress the need to safeguard financial stability

The International Monetary Fund (IMF) stressed that when it comes to Sri Lanka’s restructuring of local debt, the country needs to “make sure to safeguard its financial stability”.

“… the government is currently working and we'll flesh out a strategy on that, hopefully very soon. That's the next step,” said Krishna Srinivasan, Director, Asia and Pacific Department of IMF at a press briefing yesterday. 

Indicating that the debt in Sri Lanka was assessed to be unsustainable and that's why, Mr Srinivasan noted that before the program could be approved, there had to be a path towards restoring sustainability. “ And that includes restructuring debt to all creditors -- private creditors, official creditors, and to some extent, domestic debt, for the simple reason that debt sustainability is quite a big challenge in Sri Lanka. But when you restructure domestic debt, you have to make sure that you also safeguard financial stability,”

Responding to a question on the latest IMF view on the economic outlook of Sri Lanka compared to regional economies, the Director for Asia and Pacific region said: “ Sri Lanka is a country with a quintessential problem where you had twin deficit, you had a large increase in the fiscal deficits, putting pressure on the external accounts, reserves falling, exchange rate falling. And so they approached the Fund for a Fund-supported program, which was approved by the Board not too long ago. And that places the emphasis on one macroeconomic stabilization, bringing inflation down. 

Again, fiscal consolidation is based on revenue-based consolidation. That's partly because Sri Lanka has among the lowest in terms of revenue mobilization, tax collection, and that goes back to the policy mistake they made pre-pandemic, wherein they cut taxes across the board, whether it's VAT, corporate tax, and personal income tax. So the Fund-supported program is a revenue-based consolidation which provides stability to the economy.

Noting that the country’s inflation has come down, albeit from high levels, Mr Sirinivasan indicated that inflation has to come down durably "because let's not forget, inflation is the worst kind of tax on the poor and the poor and the vulnerable are hurting the most. And so you want to get inflation under control. And so that's something which, again, in terms of monetary policy, with support of fiscal policy, has to bring inflation down to levels which are reasonable,"