•  Says SL needs IMF programme to restructure its external debt
• SL received SDRs equivalent to US$ 800mn from IMF’s latest SDR allocation
• Believes US$ 800mn SDR allocation to be the main external funding source for the remainder of the year
• SL’s next largest external debt repayment of US$ 500mn due on Jan.18 next year

The Internal Monetary Fund’s (IMF) US$ 800 million Special Drawing Rights (SDRs) allocation to Sri Lanka is only likely to provide some breathing space to the debt-ridden nation to delay a much needed IMF programme for a possible debt structuring until early next year, according to the Institute of International Finance (IIF), a Washington-based global association of the financial services industry.

“About US$ 275 billion went to emerging and frontier markets, and developing countries. For major EMs, the increase in reserves from the SDR allocation is too small to change the outlook. The situation is different in a few distressed EMs and FMs. For example, the SDR allocation will help Argentina and Sri Lanka delay much needed IMF programmes. All in all, the SDR allocation is irrelevant for the global outlook but matters for small countries in distress,” IIF said in its latest report.

IFF forecasts Sri Lanka to maintain its gross foreign exchange reserves in the range of US$ 2-2.5 billion by end of this year while expecting the US$ 800 million SDR allocation to be the main external funding source for the remainder of this year. 

“The country has already repaid two external bonds out of reserves and current account deficits will remain wide absent a recovery in tourism. Some official financing is still available, but we expect the US$ 800 million SDR allocation to be the main external funding source for the remainder of the year,” it added.

In July, the country’s foreign exchange reveres fell to a record low of US$ 2.83 billion from US$ 4.06 billion in June after a US$1 billion International Sovereign Bond (ISB) settlement in July.

According to Fitch Ratings, Sri Lanka has around US$ 6.5 billion in external debt servicing this year including ISBs, Sri Lanka Development Bonds and bilateral loans. 

The IMF’s US$ 800 million SDR allocation accounts to around 12 percent of the country’s gross external financing needs for 2022.

Sri Lanka’s next largest external debt repayment of US$ 500 million ISB scheduled to mature on January 18, 2022. IIF outlined that after settling this US$ 500 million ISB, Sri Lanka’s government would have to seek a large debt adjustment under an IMF programme as it would struggle to settle US$1 billion ISB scheduled to mature on July 25, 2022.

“End-2021 reserves may be high enough to pay the US$ 500mn bond due next January, but the situation would have been extraordinarily tight without new SDRs . A lasting solution to Sri Lanka’s problems requires large adjustments that may only be feasible under an IMF programme,” IIF noted.