IMF bailout will come as budget support this time, says CB chief

• Says in addition to helping CB to prop up reserves, IMF lending this time will go for cutting fiscal deficit
• “This time what is special with the Extended Fund Facility is that, even the IMF funding will come as budget support, not only for balance of payment support,”- CB chief 
• Says talks with bilateral creditors progressing well; cites internal issues in China for the delay in engaging with that country 
• Says WB, ADB ready to extend policy-based lending once IMF Board approval is secured for programme support 

Dr. Nandalal Weerasinghe
Pic by Nimalsiri Edirisinghe

As crisis-hit Sri Lanka awaits a lifeline from the International Monetary Fund (IMF), the country’s Central Bank chief said the expected bailout package would this time come as budget support in addition to strengthening the country’s balance of payment
(BOP) position.  

“This time what is special with the Extended Fund Facility is that, even the IMF funding will come as budget support, not only for balance of payment support,” Dr. Nandalal Weerasinghe said yesterday during a panel discussion at the Sri Lanka Economic Summit 2022 organised by the Ceylon Chamber of Commerce. 
“If you remember, all the earlier IMF financial assistance came only to the Central Bank. They lent to the Central Bank to build up our reserves. That is for balance of payment support. But given the situation, now this time, IMF funding is also available to support the fiscal deficit,”
he added. 

Sri Lanka entered into a staff-level agreement with the IMF in early September for a US$ 2.9 billion, 48-month facility under the Extended Fund Facility (EFF) arrangement. This marks the 17th time the country has gone to the IMF to resurrect its economy. 

However, to unlock the IMF funds, Sri Lanka needs the approval of the IMF Executive Board for programme support. For that Sri Lanka needs to secure the so-called financing assurances from its external creditors to make the country’s debt sustainable by striking a deal with them to restructure debt. 
After announcing a debt standstill in April, Sri Lanka for the first time in its post-independence history defaulted on its foreign borrowings in May.  
Sri Lanka’s foreign debt pile to both official and commercial creditors stand close to US$ 50 billion. Majority of its official debt is with China and India, which are non-Paris Club countries. 

Sri Lanka has already held two rounds of talks with its official creditors to obtain financing assurances and to restructure debt. Governor Weerasinghe said the talks with creditors are progressing well, specially with India
and Japan.
Talks with China, Sri Lanka’s largest bilateral creditor appear to be lagging, which Governor Weerasinghe attributed to internal issues in China such as the Covid-19 lockdowns and the Chinese Communist Party Congress. 

Meanwhile, once the IMF Board approval is secured, Dr. Weerasinghe said the Asian Development Bank and the World Bank have agreed to extend policy-based lending, to support financing the gap.
He said these loans, which are currently being negotiated at the Finance Ministry level, are linked to various structural reforms in the economy. 

“IMF structural reforms are focusing on very few areas; mainly social safety nets, eliminating corruption vulnerabilities and financial sector reforms. In addition to that, World Bank and the ADB are supporting a lot of other reforms, mainly financial sector long term reforms, power sector reforms etc,” he said.
“Plus, the financing gap is also being filled by the debt relief we are expecting from our creditors. If we get the debt relief for a long period, that means the pressure on our balance of payment is less and we should be able to build up our reserves through other sources,” he stressed.