Sri Lankan president warns against postponing IMF loan agreement until September

Sri Lanka’s new president has said it will take until at least September to obtain a loan from the International Monetary Fund, after weeks of protests and political turmoil sparked by the country’s economic crisis.

Ranil Wickremesinghe, who took office this month after protesters forced his predecessor Gotabaya Rajapaksa to flee the country, said in a speech that it would take longer than expected to finish negotiations.

“My goal in July was to reach an agreement and have the IMF board approved by the first week of August,” said Wickremesinghe, who previously served as prime minister.

Since the events [earlier in July] All of these will be delayed now. It will take until the end of August. Only in September will we be able to get approval.”

Wickremesinghe had previously said he wanted a deal as early as June. Sri Lanka has been rocked by weeks of turmoil amid widespread anger at the government, which protesters blame for pushing the country into its worst economic crisis in decades.

Sri Lanka defaulted on its external debt of more than $50 billion in May, the first Asia-Pacific country to do so in more than two decades, after virtually depleting its foreign reserves. The lack of foreign currency for imports has led to severe shortages of everything from fuel to medicine, which has led to a collapse in living standards.

The country began negotiations with the International Monetary Fund this year for a $3 billion rescue plan, and is also in talks with other lenders including the Asian Development Bank and countries such as India and China for more financial aid.

Analysts said the government may need to pursue a package of painful economic reforms before finalizing an agreement with the International Monetary Fund.

Sri Lanka’s central bank governor, Nandalal Weerasinghe, told the Financial Times that the government needs to push through “several tax measures, several measures to curb spending and restructure state-owned enterprises”.

Credit rating agency Fitch said that while the government has a large parliamentary majority to help pass such reforms, it risks provoking more public opposition.

“In the absence of an agreement with the IMF, we expect Sri Lanka to face a very tense external situation in the near term,” Fitch said in a note. “The country has very little foreign exchange to pay for even basic imports like fuel, food and medicine.”

Sri Lanka has become an extreme example of the pressures facing many developing countries after the global rise in fuel and food prices following Russia’s invasion of Ukraine, exacerbating the financial stress caused by the Covid-19 pandemic.

Many of Sri Lanka’s neighbors are also feeling nervous. Pakistan this month approved an initial deal to disburse more than $1 billion from the International Monetary Fund to increase its foreign exchange reserves. This week, Bangladesh reached out to the International Monetary Fund to start talks on a multi-billion dollar loan.

Economists said Sri Lanka’s problems were a result of economic mismanagement and spending on infrastructure projects for white elephants under the Rajapaksa family, who ruled the country for two decades.

Many protesters also want Wickremesinghe to resign. Soon after taking power, baton-wielding police cleared a large protest site in Colombo in a show of force under the new president.

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