Sri Lanka to announce parameters of external & domestic debt operations before end-April

Sri Lankan authorities are currently exploring options for a domestic debt operation which is aimed at providing substantial liquidity relief to the government, the Letter of Intent sent to the IMF Managing Director showed.

This will be carried out in line with the program parameters while preserving financial stability to avoid further eroding Sri Lanka’s repayment capacity.

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"In this regard, we are concluding our preparatory work and plan to make an announcement on the coverage and parameters of the external and domestic debt operations before end-April 2023," the letter said.

The letter along with its attachments sent to the IMF on 06 March 2023, has been signed by Ranil Wickremesinghe as the Minister of Finance and Nandalal Weerasinghe as the Governor of the Central Bank.

"In line with our commitment to equitable treatment of all our external creditors, Sri Lanka will refrain from resuming debt service payments to any external commercial or bilateral creditor unless it agrees to a comprehensive debt treatment in line with the IMF program parameters, debt sustainability targets, and the comparability of treatment principle."

The authorities further said that they are willing to use additional safeguard mechanisms, including appropriate forms of contractual commitments such as Most Favored Creditor Clause, acceptable to relevant creditors at the time.

As per the letter, the country is committed to reducing the ratio of public debt to GDP to below 95 percent by 2032 from around 128 percent in 2022; reducing the central government’s annual gross financing needs below 13 percent of GDP, on average, in 2027-32, from 34.6 percent of GDP in 2022; and reducing the central government’s annual debt service in foreign currency below 4.5 percent of GDP in every year in 2027-32, from 9.4 percent of GDP in 2022.

Sri Lanka will refrain from monetary financing and commit to allowing greater exchange rate flexibility and rebuilding international reserves, the letter further said.

"We commit to meet the program targets on Net Official International Reserves (NIR) which are predicated on the CBSL’s outright FX purchases on a net basis by $1.4 billion in 2023," the letter showed.

The reduction in the CBSL’s holdings of Treasury securities and the discontinuation of monetary financing will be monitored by a quantitative performance criterion on the ceiling of the CBSL’s net credit to the government.

"The ceiling for end-June 2023 is set at the level recorded at end-January 2023, and is programmed to be reduced by Rs 150 billion during 2023H2. A program adjustor will be introduced to allow monetary financing in the case of a potential shortfall in external program financing in the first 6 months of the program.

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