THE BIG PICTURE

THE ECONOMIC TUG-OF-WAR

Why the wait is far from over

Sri Lanka’s economic roller coaster is steaming ahead – ahead of the completion of the IMF’s four year Extended Fund Facility (EFF) of around US$ 3 billion in March next year (subject to the lender’s eighth and final review), and the end of the debt moratorium in April 2028. 

Thankfully, the IMF and Sri Lankan authorities reached a staff level agreement on the EFF’s seventh review on 5 October, albeit that board approval is subject to the government’s 2027 budget and completion of its review of financial assurances related to foreign debt restructuring.

Some estimates of Sri Lanka’s major external debt repayments, and principal obligations to bilateral and commercial creditors – including sovereign bond holders – amount to four million dollars a month or nearly US$ 50 million annually.

First on the table is the debate about whether the government would want to enter into a new agreement with the International Monetary Fund – despite its politically unpopular fiscal mandates – under whose aegis the economy has been navigated since the unprecedented economic crisis that led to a declaration of bankruptcy back in April 2022.

The likes of Bloomberg have reported that the nation’s local and foreign debt obligations at the time stood at a whopping 8.6 billion dollars.

In the meantime, people – including the poor and taxpayers alike, at least as far as both VAT and PAYE rates and thresholds are concerned – are expecting some relief to kick in from April next year, when the government’s second budget is presented in parliament on 12 November.

Making this juggling act even more challenging is the fact that inflation is now in the high single digits (8% at the last count, in September), which is substantially higher than the Central Bank of Sri Lanka’s five percent target for the next three years. 

Moreover, there is a risk that the current pace of inflation could head north amid ongoing concerns over the price of oil, despite the announcement of costly subsidies until at least the end of this year, amid a currency deprecation of some eight percent so far this year.

The bottom line is that the economic balancing act will continue until we see the light of day – and that may take a lot more than subtle tinkering with the economic mandate – be it that of the IMF or our own.

– Editor-in-Chief