SL’s talks with IMF at risk amid political crisis

Army soldiers and CMC workers near a bus toppled and set ablaze in Colombo following violence 
Pic by Kithsiri De Mel

• Stability of  country’s political establishment in question
• Former CB Deputy Governor expects SL’s talks with IMF to run into legal obstacles 
• Says with PM’s resignation, Cabinet of Ministers cease to hold office
• With President Gotabaya still in power, a “stable political equilibrium may prove elusive,” says Citi in a note to clients 

Sri Lanka is likely to face complications and delays pertaining to its talks with the International Monetary Fund (IMF) for a rescue package amid the resignation of Prime Minister Mahinda Rajapaksa. 

As per Sri Lanka’s Constitution, the resignation of the Prime Minister means that the Cabinet of Ministers stands dissolved along with the Ministry Secretaries who are appointed by the President.

Former Central Bank Deputy Governor and popular commentator of economic matters Dr. W.A. Wijewardena expects Sri Lanka’s negotiations with the IMF to run into legal obstacles. 

“IMF negotiations run to legal issues because with President Rajapaksa’s resignation, Cabinet is dissolved; so, no govt. Finance Minister; with Cabinet dissolved, Secretaries cease to hold office; hence, Secretary to Finance Ministry has no power to negotiate; only CBSL Governor stays and he should get mandate from new govt. to do so,” Wijewardena tweeted. 

Sri Lanka began virtual talks with the IMF on Monday after Sri Lankan Finance Minister and officials met with the IMF in Washington in mid April, to continue discussions on potential programme support. The IMF said the talks will be held during May 9-23. 

Meanwhile, Bloomberg, quoting a note Citigroup Global Markets had sent to its clients said ,Sri Lanka faces complications and delays in bailout talks with IMF amid questions over political stability after Prime Minister Mahinda Rajapaksa’s resignation. 

Even after Mahinda Rajapaksa’s resignation on Monday, protesters targeted the homes and properties of ruling-party lawmakers. 

The demonstrations, which have beset the capital Colombo for weeks, come as inflation quickened to close to 30 percent in April amid a sharp drop in the rupee against the US dollar.

The resulting economic contraction and widespread hardship “would raise questions about the stability of the current political establishment and its ability both to negotiate an IMF programme as well as implement a tough economic programme,” Bloomberg said quoting the Citigroup note to clients.

The resignation of the Prime Minister could be seen as a way to appease political factions in order to negotiate a programme with the IMF and perhaps an attempt to appease public discontent, Citi said. 

But with President Gotabaya still in power, a “stable political equilibrium may prove elusive,” the note added. President Gotabaya Rajapaksa is yet to address the nation after the resignation of his brother as the Prime Minister. 

Yesterday, in a twitter message he appealed and urged people to “remain calm and stop violence and acts of revenge against citizens, irrespective of political affiliations. All efforts will be made to restore political stability through consensus, within constitutional mandate and to resolve economic crisis.” 

However, people who have camped outside President Rajapaksa’s office are continuing to call for his resignation.
Meanwhile, the political crisis in the island nation and the power cuts have kept tourists away, depriving it from much needed foreign exchange. 

The country’s foreign reserves currently stand less than US$ 50 million, which barely covers one day of imports. Sri Lanka has turned largely to India or China to provide up to US$ 4 billion in bridge financing and the extent and duration of this financing is unclear, Citi said, adding that its dollar bonds are likely to continue to weaken with prices now close to Citi’s recovery value analysis. The 5.875 percent sovereign dollar bond due in July 25 indicated 0.12 cents lower at 45.66 cents on the dollar, after dropping 0.75 cents Monday, Bloomberg-compiled prices showed.