Sri Lanka reached an agreement with the International Monetary Fund for $1.5 billion in loans to help lower its borrowing costs and fix its finances.
The country has pledged to narrow its fiscal deficit to 3.5 percent of gross domestic product by 2020 through “a comprehensive set of reforms to Sri Lanka’s tax system,” the Washington-based lender said in a statement. The budget gap widened to 7.4 percent of GDP in 2015 from 5.7 percent a year earlier, according to the central bank.
The loan “is a dose of confidence that Sri Lanka is trying to create a clearly defined road map going forward," central bank Governor Arjuna Mahendran told Bloomberg on Friday morning. “It will help with messaging to financial markets our targets and intentions."
The loan program will need approval by the IMF’s executive board, which is due to consider it in early June. Once approved, it’s “expected to catalyze an additional $650 million in other multilateral and bilateral loans, bringing total support to about $2.2 billion, over and above existing financing arrangements,” the IMF said.
Sri Lanka is facing refinancing concerns that prompted Fitch Ratings to downgrade the nation’s debt. The nation last sought IMF help in 2009 to bolster its international reserves following the end of a three-decade old civil war, and received the final tranche of a $2.6 billion loan in 2012.
The loan package “will provide external liquidity to ease immediate financing pressures,” Marie Diron, senior vice president, sovereign risk group at Moody’s Investors Service, told Bloomberg in an e-mail Friday. “It could reverse the decline in official foreign-exchange reserves and reduce Sri Lanka’s vulnerability to a sudden stop in capital inflows.”
IMF funds will also likely be “at more favorable terms than Sri Lanka can avail of through the market, which alleviates debt servicing cost pressures,” Diron said.
While Sri Lanka plans to tap the market for funds, it needs to stay disciplined due to its high debt-to-GDP ratio, Mahendran said. The nation is looking to roll over short-term debt into cheaper long-term notes, he said.
(Bloomberg)
