IMF rescue package could take six months after staff-level agreement

• Prof. Prema-chandra Athukorala says China’s position on SL’s debt could drag negotiations for at least six months
• Cites Zambia as example where debt restructuring negotiations took about 7 months to conclude as a result of China’s initial hesitancy in debt restructuring 
• After reaching staff-level agreement, debt restructuring advisors will approach creditors to obtain financial assurances from them to secure IMF facility 
• However, former CB Governor Dr. Coomaraswamy and current Governor Dr. Weerasinghe hopeful of fund disbursement by end of this year 

After reaching a staff-level agreement, the full approval for the envisaged International Monetary Fund (IMF) Extended Fund Facility (EFF) arrangement could take about six months considering challenges in the negotiations process with the country’s external creditors, particularly China, according to experts. 

An IMF staff team, which is currently in Sri Lanka, is holding discussions with the authorities with the intention of reaching a staff-level agreement on the envisaged IMF EFF facility. The mission is expected to conclude on Wednesday and the Central Bank expects to reach a staff-level agreement upon conclusion of negotiations.
Central Bank Governor Dr. Nandalal Weerasinghe recently expressed confidence of the disbursement of the first tranche of the envisaged IMF programme by end of this year, with expectations of all external creditors including China cooperating with the government to secure the financial assurances in December.

After reaching a staff-level agreement with the IMF, Sri Lanka’s debt restructuring advisors are expected to officially approach the country’s bilateral and commercial creditors to obtain financial assurances from them to secure the IMF Executive Board approval for the envisaged EFF facility.

“It’s usually a matter of weeks between a staff -level agreement and a full programme, but when your debt is unsustainable, you cannot move from a staff-level agreement to a full programme until you have demonstrated that you have sufficient financial assurances to move towards a sustainable debt dynamic. 

In our case, it’s happening parallely. While the policy discussions are going on, debt advisors are working with the austerities to achieve a path towards debt sustainability,” former Central Bank Governor Dr. Indrajit Coomaraswamy told a virtual conference organised by the Department of Business Economics of University Sri Jayewardenepura last week.

Australian National University Professor in Economics Prof. Prema-chandra Athukorala opined that it’s likely to take 6-7 more months for Sri Lanka to secure the approval for the envisaged IMF programme.
“Zambia started negotiations with the IMF and they reached a staff-level agreement with the IMF in December 2020, however, it took until last week to get the debt restructuring completed, because the Chinese were reluctant to participate in debt restructuring initially.  Altogether, it took around 7 months,” he said.
However, marking a breakthrough, China who is not a member of the Paris Club, joined Zambia’s official creditor group as a co-chair in May this year supporting Zambia’s request for an IMF programme.

“A lot of people are hopeful that China should be more sympathetic to the Sri Lankan case, given that China has changed its approach due to the agreement with G-20 countries (the G20’s Common Framework). If that happens, it will be finalised within six months. However, I don’t think it will happen in December,” he added.

However, Dr. Coomaraswamy remarked that there’s still a possibility for Sri Lanka to secure required financial assurances from the external creditors by December. “Given there’s possible shift of China’s approach, it’s not impossible to secure first tranche by December,” he remarked.