• What does instability mean for Sri Lanka’s talks with the IMF?

By Shenal Fernando  It has been said that Sri Lanka is facing its worst economic crisis since independence. A foreign exchange liquidity crisis, together with an expanding fiscal deficit due to the misguided commitment to maintaining a low tax regime in order to spur economic growth, a falling exchange rate, and historic inflation rates has brought Sri Lanka to its knees.  Sri Lanka is on the verge of bankruptcy, unable to pay for even its essential imports such as food, medicine, and fuel. On 12 April 2022, the Ministry of Finance finally admitted defeat in its efforts to guard Sri Lanka’s unblemished record of external debt servicing since independence. Accordingly, the Ministry announced that it would be suspending normal debt servicing of its affected foreign debt for an interim period pending an orderly and consensual restriction of such foreign debt in a manner consistent with an economic adjustment programme supported by the International Monetary Fund (IMF).     In the aftermath of this announcement, Sri Lanka turned to the IMF for its 17th IMF programme since independence. However, on Monday, 9 May 2022, which will prove to be a watershed moment in the history of Sri Lanka, violent protests broke out island-wide against the ministers of the current Government following the violent attack on the GotaGoGama protesters in front of the Presidential Secretariat earlier that day by supporters of former Prime Minister Mahinda Rajapaksa. By evening, due to nationwide pressure, the Prime Minister resigned from office. As a consequence of the Prime Minister’s resignation, the Cabinet of Ministers was automatically dissolved in terms of Article 49 of the Sri Lankan Constitution of 1978 and all secretaries of ministries ceased to hold office thereupon in terms of Article 52 of the Constitution. Minister of Finance M.U.M. Ali Sabry PC and Treasury Secretary Mahinda Siriwardena also ceased holding office, and thus the only remaining high ranking official who was part of the delegation that met the IMF during 16-18 April 2022 was Central Bank of Sri Lanka (CBSL) Governor Dr. Nandalal Weerasinghe. In the aftermath of this development, serious questions arose as to whether Sri Lanka will have to suspend negotiations with the IMF until a Cabinet was appointed and how this political uncertainty would affect the debt restructuring process.   Current stage of discussions with the IMF   Sri Lanka carried out its first round of technical discussions with the IMF in April, following which the CBSL Governor provided a detailed disclosure of the steps taken so far and steps to be taken going forward in obtaining an IMF programme and in restructuring the country’s foreign debt, at the CBSL press conference on ‘New measures taken to improve the domestic foreign exchange market’ on 29 April 2022. Weerasinghe stated: “We had already commenced technical discussions with the IMF virtually before we went to New York and once we went there, we continued discussions during the week regarding the obtaining of an External Fund Facility programme. We hope to complete these discussions within the next two months and to come to a staff-level agreement, which will provide some certainty regarding the progression of discussions. Subsequently, the results of our discussions will be presented to their Executive Committee for approval. Once approval is granted, we will be able to obtain the necessary funds from the facility progressively.  “On the other hand, we will continue with our debt restructuring process which commenced on 12 April. The next step in this debt restructuring process is to appoint financial and legal advisors. This process is currently ongoing and we hope to present our selected candidates to the Cabinet of Ministers within a short period of time. Once they are appointed, they will commence discussions with our creditors which include commercial creditors, Paris Club countries on a bilateral basis, and non-Paris Club countries such as India and China with regard to obtaining some relief in relation to our foreign debt. Therefore, while discussions are ongoing with the IMF, we will also engage in discussions with our creditors parallelly. Once we have made substantial progress in the debt restructuring process, on that basis the IMF can commence the External Fund Facility programme. We hope to complete this process within the next two months.” The second round of Sri Lanka’s technical discussions with the IMF was scheduled to be carried out during 9-23 May 2022. However, the continuity of these discussions became doubtful following the developments on 9 May 2022. These doubts were dissuaded by the IMF, which announced that the technical level discussions between its officials and Sri Lankan authorities would continue in order to be ready for talks once a new government was formed, though it was concerned about the rising social tensions and unrest. IMF Sri Lanka Mission Chief Masahiro Nozaki in a statement noted: “The IMF is closely following developments in Sri Lanka and is concerned about rising social tensions and violence.” “On our virtual mission during 9-23 May, discussions at the technical level have just started and continued as planned so as to be fully prepared for policy discussions once a new government has been formed,” Nozaki said. Similar assurances were given by the CBSL Governor who stated that since technical discussions were a standard process, they would be carried out as usual; however, policy implementations would require decisions to be made by State authorities.    Impact of the political crisis   The current political instability is particularly problematic due to the prevailing economic crisis in the country, which essentially requires a stable and credible government, capable of successfully negotiating a loan facility with the IMF or winning crucial bridge loans from countries willing to bail out Sri Lanka.  In the aftermath of the political fallout from the events on Monday (9), the last remaining top-ranking finance official – the CBSL Governor – warned that he would resign unless the Government and all other political parties worked together to achieve political stability. “I took on this responsibility with expectations that political stability will be established. It’s been more than a month with no progress. I do not wish to continue in this post if political stability is not achieved,” warned Weerasinghe. He further pointed out that apart from the IMF and talks on debt restructuring, Sri Lanka needed a finance minister to take essential steps including raising taxes and energy prices. If revenues failed to grow, the Central Bank would have to print more money, he cautioned. Speaking to The Sunday Morning Business, Advocata Institute Senior Visiting Fellow Dr. Roshan Perera commented on whether the lack of a finance minister would impede discussions with the IMF and the debt restructuring process. “The technical sessions with the IMF that had commenced on Monday (9) would likely continue, but the issue is when it is required to sign off on any documents like a Letter of Intent for example. Whoever is signing has to be legally entitled to do so. But I hope we don’t wait that long with the current status quo, since we cannot afford to delay this any longer. Every day is a cost to this economy,” she said. Similar sentiments were expressed by former Chairman of the Ceylon Chamber of Commerce Chandra Jayaratne, who stated that the talks with the IMF on debt sustainability, which were set to commence on Monday (9), could be carried out by officials without any endorsement from Sri Lanka, as there was no official government in place after the resignation of Mahinda Rajapaksa as the Prime Minister. He said that the CBSL Governor and Treasury Secretary could carry on the talks and present their plans for future debt repayment based on forecasts. However, he noted that if the talks required the endorsement of certain policies, such as reduction of expenditure, an increase of government revenue, transfers for the poor to ease their suffering, and other reforms, they would “require endorsement by the Government before they can be put in place”. Thus, the officials of the Treasury and the CBSL could hold the talks but they will be unable to commit to anything without a finance minister present at the discussions. “Delays in entering into a programme will make it much more difficult for Sri Lanka to survive,” Jayaratne stressed. Advocata Institute Chairperson and JB Securities CEO Murtaza Jafferjee told The Sunday Morning Business that Sri Lanka and the IMF could continue with these technical discussions and reach a staff-level agreement without a finance minister, but the issue would be legally making any commitments. CBSL former Deputy Governor W.A. Wijewardena pointed out that in the absence of a finance minister, the CBSL Governor lacked the mandate to engage with the IMF, negotiate, and make any decisions. He further pointed out that it also raised the dilemma of whether the new government that is to be established would want to seek IMF assistance for a loan package. Therefore, he stated that we had in fact taken several steps backward instead of going forward on our road to achieving economic recovery.   Addressing foreign media on 21 April, former Finance Minister Sabry made assurances that the legal and financial advisors necessary for the debt restructuring process would be appointed in 20 days. However, following the recent developments, it is unlikely such appointments will be made within such a timeline.     This was recognised by Wijewardena who stated: “Sri Lanka will face a big problem in the coming days if the current situation continues. Because even if the CBSL selects parties to act as our financial and legal advisors, they would still require Cabinet approval to appoint them. Therefore, the utmost priority of the Democratic Republic of Sri Lanka is to establish a credible government and to appoint a Cabinet of Ministers so that it can move Sri Lanka’s economic recovery programme forward.” Meanwhile, on Tuesday (10), Bloomberg reported that Sri Lanka faces complications and delays in bailout talks with the IMF amid questions over political stability after the Prime Minister resigned. “Even after the brother of President Gotabaya Rajapaksa resigned as Prime Minister on Monday, protestors targeted the homes and properties of ruling-party lawmakers, reports said. The demonstrations, which have beset the capital, Colombo, for weeks, come as inflation quickened to close to 30% in April,” Bloomberg reported.