StanChart says IMF deal only likely in 2Q amid protracted talks with official creditors

• Says this could in turn delay negotiations with commercial creditors 
• Says any debt restructuring only appears to be possible at end of this year 
• Cautions delay could prolong economic misery for people as economy projected to decline 1% 
• Says Sri Lanka could end up overshooting fiscal targets set by IMF
• Highlights financial sector liquidity and solvency risks from looming domestic debt restructuring  

The Executive Board sign-off for the International Monetary Fund (IMF)-sponsored bailout package for Sri Lanka may not happen until the second quarter of this year, as the country is likely to see delays in obtaining financing assurances from its bilateral creditors to restructure debt, according to Standard Chartered (StanChart) Global Research. 

Following the Staff-level agreement in early September with the IMF for a US $ 2.9 billion, four-year fund facility in early September, there were expectations among the officials engaged in the negotiations to successfully obtain the creditor assurances by November and then to unlock the facility by December. 

Then the timeline moved to January 2023 and now the authorities say first quarter. The Central Bank last week refrained from providing a specific timeline when referring to unlocking the IMF funds by saying “early 2023”.
Analysts at StanChart Global Research believe Sri Lanka’s “negotiations with bilateral lenders taking longer than expected”, pushing the “board approval to happen in 2Q-2023 (versus 1Q previously)”.

This could in turn delay the negotiations with commercial creditors that hold Sri Lanka’s international sovereign bonds, which StanChart thinks could be pushed back to the back half of the year, delaying any debt restructuring deal to the end of this year. 

“As a result, we expect a restructuring deal to be reached only by end-2023,” StanChart said. 
“Achieving the IMF’s qualitative and quantitative targets, including the timely restructuring of commercial debt, could pose challenges, potentially disrupting the IMF programme,” it added, signalling prolonged difficulties even after an IMF deal.   

The delay in striking a deal with the IMF could exacerbate the economic misery of people, which could lead to possible social and political unrest, the kinds of which were seen in the mid part of last year.
Yet, the debt standstill, the suppressed imports and the gradual recovery in the remittance and tourism flows could help to ameliorate some pressures in the interim. 

However, StanChart remains “concerned about the liquidity and solvency of the banking sector, given its exposure to a weak economy and sovereign debt”.

The banking sector has already cited liquidity as its biggest challenge, apart from interest rates, foreign exchange and capital. The banks have also indicated they have zero tolerance towards potential restructuring of local debt by way of a haircut.

They have already appointed their own financial and legal advisors to represent them in debt restructuring talks, with the aim of safeguarding their own interests. 

Meanwhile, StanChart said the economy is expected to remain in decline for the second year running in 2023 but at a mild one percent, after an estimated 7 percent contraction in 2022.

“This would make achieving a primary deficit target challenging. We now expect a primary deficit of 2.2 percent of GDP in 2023, versus the 0.7 percent target set by the IMF; this pushes our 2023 fiscal deficit forecast to 11.0 percent, from 9.0 percent previously,” it added.