Sri Lanka has reached an agreement with the International Monetary Fund (IMF) to secure a US$1.5 billion three-year Extended Fund Facility subject to IMF Executive Board approval in June, the global lender announced on Friday.
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.
According to the agreement, Sri Lanka has pledged to trim its fiscal deficit to 3.5 percent of Gross Domestic Product by the year 2020 through “a comprehensive set of reforms to Sri Lanka’s tax system,” the Washington-based lender said in a statement. The Central Bank last week announced that the budget deficit had sharply widened to 7.4% of GDP in 2015 from 5.7 percent a year earlier.
Commenting on the IMF’s announcement, Senior Vice President, Sovereign Risk Group, Moody’s Investors Service, Marie Diron said the IMF agreement will have three benefits for Sri Lanka’s external financing profile.
First, programme disbursements together with forthcoming multilateral and bilateral loans will provide external liquidity to ease immediate financing pressures. It could reverse the decline in official foreign-exchange reserves and reduce Sri Lanka’s vulnerability to a sudden stop in capital inflows. Second, the financing will likely be at more favourable terms than Sri Lanka can avail of through the market, which alleviates debt servicing cost pressures. Third, if the agreement restores investor confidence in Sri Lanka’s policy framework, it could ultimately support more stable private external inflows, such as FDI.
“The agreement comes as Sri Lanka’s sovereign credit profile is increasingly under pressure from its large fiscal deficits, high debt levels and poor debt affordability.”