IMF external liquidity support still a possibility: S&P

External liquidity support is still very much a possibility for Sri Lanka from the International Monetary Fund (IMF) or from any other bilateral lender if such a requirement arises, according to a US-based credit rating agency.

Standard & Poor’s Ratings Services (S&P) said although it expects an improvement in Sri Lanka’s external liquidity, it would remain exposed to international liquidity conditions.

“We expect Sri Lanka to be able to secure new external liquidity support from the IMF or bilateral sources if the need arises,” S&P’s rating update stated.

External liquidity is a country’s ability to meet all its obligatory external payments such as loan repayments, interest payments and imports for the next 12 months from the available total foreign reserves.

External liquidity could come under pressure due to factors which are both internal and external to a country – high debt financing, global oil price increase and a sudden capital flight triggered by developments in other financial markets.

In 2009, Sri Lanka was bailed-out by the three-year IMF US $ 2.6 billion Standby-Arrangement facility when the country was heading an acute balance of payment crisis triggered by dwindling foreign reserves when the Central Bank sold its reserves to defend the rupee from falling.

Last year, the visiting IMF staff mission told that they were always open for a new programme but no requests were made so far to that effect.

“It is very much a demand-driven process. From our side, we are always open. But that hasn’t discussed during this mission,” the mission chief Todd Schneider said.

However, Sri Lanka’s efforts to obtain unlikely budget support from the multilateral lender fell apart in February last year. Although there is no visible threat to the external sector as claimed by the country’s official economic institutions, Sri Lanka remains among the most vulnerable countries under t he UN ESCAP’s external debt vulnerability yardstick.

According to the yardstick, in 2012 and 2013, Sri Lanka’s short-term obligations are 197 percent and 188 percent bigger than the available foreign reserves.

Meanwhile, S&P also projects Sri Lanka’s gross external financing needs in 2014-2017 will average 106 percent of current account receipts (CAR) plus usable reserves, with an improving trend.

“We also forecast that the country’s external debt—net of official reserves and financial sector external assets—will approximate 125 percent of CAR this year. In our view, external net debt stock measure will gradually decline to below 110 percent by 2017,” the rating firm said. (DK)