Sri Lanka to Knock on IMF

 Basil Rajapaksa admits the country is negotiating with overseas bondholders and may ask IMF for help

by Benjamin Parkin in Colombo and Tommy Stubbington in London for Financial Times 

Sri Lanka is negotiating debt relief with international bondholders and is weighing an approach to the IMF, as the country struggles with a foreign reserve crisis that has left it close to default.

Basil Rajapaksa, finance minister, told the Financial Times in an interview that the government was “negotiating with everybody” and “trying all our options” to avoid default and alleviate the economic crisis.

“We have [international sovereign bonds] which we have to repay back, so we are negotiating with them. Then we have creditors and we have to service their debt, so whether we can have an adjustment or some type of thing,” he said.

Rajapaksa added that the government would “think about a programme with the IMF . . . All those discussions are going as well.”

Many investors think Sri Lanka will become the latest to default on its sovereign debt during the pandemic, after the likes of Belize, Zambia and Ecuador. The country has almost $7bn in debt payments due this year but less than $3bn of foreign reserves.

Some Sri Lankan officials have insisted that the country can avoid this fate by boosting foreign currency reserves through tourism and exports while securing additional assistance from China and India, two of its largest benefactors. The central bank governor this week told CNBC that “we don’t need relief” from the IMF.

Rajapaksa insisted the government could manage but was preparing for contingencies. “I know it’s very difficult because we have to pay this year $6.9bn and, additional to that, we have to find money for medicine, raw material, fuel, all these things,” he said.

The lack of foreign currency reserves has caused power cuts and shortages of imports, including fuel and milk powder, which have exacerbated double-digit inflation.

More than a third of Sri Lanka’s debts are owed to international bondholders and the country last week repaid a $500m bond. Another $1bn is due in July but Dimantha Mathew, head of research at First Capital brokerage in Colombo, said the country might have already run out of foreign currency by then.

Its long-dated dollar bonds are trading at less than half their face value, suggesting foreign fund managers are speculating on how much they might get back in a restructuring rather than expecting to be repaid in full.

Asked if he was negotiating a restructuring with bondholders, Rajapaksa replied, “something like that”.

“Obviously you can understand what we want and you can understand what the bondholders would like to have,” he added.

Sri Lanka has also turned to India and China for help. New Delhi has provided almost $1bn in relief and is negotiating further assistance. Beijing last month provided a renminbi currency swap worth $1.5bn, although analysts said it was unlikely this could be used to pay the dollar-denominated debt.

President Gotabaya Rajapaksa, the finance minister’s brother, has also asked China to restructure its loans, which have swelled to more than 10 per cent of Sri Lanka’s foreign debt burden. Many say Chinese credit has exacerbated the crisis by being used for large but unnecessary infrastructure projects with little return.

Sri Lanka has previously entered 16 relief programmes with the IMF and, even before the pandemic, investors were becoming wary of its growing debt pile and meagre tax revenues.

These were further eroded when the Rajapaksa government slashed value added tax and other levies in 2019, leading to a cascade of credit ratings downgrades to junk levels.

Sri Lanka has been locked out of debt markets while the pandemic-induced collapse in tourism and remittances caused dollar inflows to drop dramatically.

“Maybe with this Indian financing they can kick the can down the road a little longer,” said Carlos de Sousa, a portfolio manager at Vontobel Asset Management, which holds some Sri Lankan dollar bonds. “But even if they repay in July, this is just delaying the inevitable.”