Polls could delay IMF deal progress, but won’t cause large deviation from current policies: StanChart

• Cautions further risks to IMF deal progress due to holdout creditors 

While there won’t be a departure from the path agreed with the International Monetary Fund (IMF) to regain economic stability, a national election which could vote in a new government could delay the progress if they tried to negotiate its own policy mechanism to achieve the sustainability goals, Standard Chartered (StanChart) Global Research said. 

Calls are growing louder specially from the Opposition parties to dissolve parliament to allow for fresh polls to give the people the chance to vote in a new government. It is widely held perception that the current rulers have lost their mandate after the economy fell off a cliff last year due their awful economic management. According to the provisions in the constitution, the President gets the power to dissolve the parliament in February when the current parliament completes a 2.5-year term. 

While local government polls are due in March and the Election Commission has already called for nominations, the government’s language and actions reflect their reluctance in going into polls as any unfavourable outcome will be bad for them in a general election.

“…the President and the government have expressed their intention to focus on stabilising the economy first,” StanChart said in its latest report referring to possible parliamentary polls and the potential risks facing the Sri Lankan economy in its road to stability.  

“While we do not expect a significant departure from current IMF policies, progress could be delayed if a new government tries to negotiate its own policy mechanisms to achieve the IMF debt sustainability goals,” it added.

While the current government has shown commitment to much of the reforms in areas of monetary and fiscal policy by way of tightening monetary policy, ending unchecked balance sheet expansion to the extent possible, raising taxes and introducing price reforms to key commodities and utilities, they appear to be pussyfooting on State-owned Enterprise and other institutional sector reforms.

Polls or no polls, “the risk of political unrest remains high in 2023”, StanChart said. 

Meanwhile, citing another potential risk, the Asia focused multinational lender said, “holdout creditors,” could delay subsequent IMF reviews, signalling potential disruptions to the progress of the deal even after receiving the Board approval for dsbursement of funds. 

While the debt assurances from official creditors would be sufficient to unlock the IMF bailout package, the fund disbursement of US$ 2.9 billion, which is happening in tranches within four years is contingent on Sri Lanka striking a deal with its official and commercial creditors for comprehensive debt restructuring. 

As a significant haircut is likely for sovereign bond holders, StanChart analysts said the probability of holdout creditors remains high.  “A similar delay in financing assurances has plagued Suriname since mid-2022. As a result, the country was unable to finalise its external debt restructuring by the end-2022 deadline the IMF had set when the programme was approved in December 2021,” it noted.