COLOMBO – Sri Lanka President Ranil Wickremesinghe called on China and Japan to complete debt talks by December as the country tries to get a sign off from the International Monetary Fund (IMF) to tap official credits.

Wickremesinghe said he met the Managing Director of the IMF at the climate summit in Egypt and was assured support.

“We now have to complete discussions with India and China. China told us to talk after the party congress. We have done it now.

“We are asking both countries to complete this by the end of December.”

An IMF macro-fiscal sign off will allow the World Bank and other lenders to give budget support loans.

Wickremesinghe said he also met the World Bank’s chief. Discussions on a policy loan had begun.

Sri Lanka defaulted on external debt in April 2022 after two years of money printing to suppress interest rates blew the balance of payments apart, with the central bank also in debt, after sharply running up foreign borrowings as two earlier currency crises triggered forex shortages.

After an April rate hike and a delay in stabilizing the balance of payments due to ACU dollars loaned by India to allow the central bank to continue interventions and sterilization (printing money after selling dollars) the balance of payments has started to stabilize.

In earlier crises, a quick float prior action of the IMF program helped restore confidence in the currency, after killing private credit, hiking utility prices and taxes to reduce public domestic credit. It was enough to get approval of IMF’s board for the first drawdown.

But in the present currency crisis, due to the default, debt has to be restructured to reduce the annual roll-over debt volume called the gross financing need (GFN) to a level the IMF sees as manageable or sustainable.

“In the past when we complete (staff level) discussions we only have to go the IMF (board),” President Wickremesinghe told Parliament on Thursday (10) responding to a request to table the IMF Staff Level Agreement in Parliament.

“But this time we have to take this and talk with other countries. Especially we are talking with Japan, then India and China.

China and Japan are not in the Paris Club of lenders who reached decisions collectively.

“At that time also there can be changes (to the Staff Level Agreement),” Wickremesinghe said. “They have given us targets in a four-year program.

“So far we do not know what China and India has to say.”

A staff level agreement is usually hammered into a formal letter of intent with more data also being available at the time and several prior actions being completed.

After getting assurances from official creditors Sri Lanka will have to negotiate with private creditors.

There was one court case and attempts were being made to resolve it, he said.

President Wickremesinghe is to present a budget in line with the IMF program on November 14, a prior action of the IMF deal.

He said he wanted to exceed the IMF targets under the four-year program.

“While we are looking at that, the budget is to try and accelerate it, so that we can have a higher growth rate and more developments and investments,” he said.

Countries with soft-peg now called a ‘flexible exchange rate’ get into periodic trouble (usually every two Fed cycles) by mis-targeting rates. When they become market access countries, soft-pegs default.

Under the IMF program soft-pegging and discretionary policy is expected to be legalized under a new central bank law. However other critics have called for tight laws to prevent the central bank’s ability to conduct open market operations and blow the balance of payments apart.

Under flexible inflation targeting as in all types soft-pegging involving conflicting monetary anchors, all errors is mistargeting rate are compensated by currency depreciation pushing entire populations into poverty and social unrest.

-economynext.com