Sri Lanka’s CBSL Governor predicts healthy dollar reserves in 4 years with IMF bailout

Sri Lanka has received a much-needed financial lifeline from the International Monetary Fund (IMF), which has extended a US$3 billion loan to the country. The funds will help bring the country’s foreign exchange reserves, which have been depleted due to its worst economic crisis since independence, to pre-crisis levels over the next four years. The bailout comes with a structured program that requires Sri Lanka to achieve debt sustainability, shore up more foreign exchange reserves, and improve state revenue by raising taxes and cutting utility subsidies.

Sri Lanka owes around US$51 billion to external lenders, and its government declared bankruptcy in July 2022. The country’s central bank governor, Nandalal Weerasinghe, said that during the program’s four-year period, Sri Lanka is committed to bringing foreign exchange reserves back to pre-crisis levels of around US$8-9 billion.

The funds will come from various sources, including concessional loans of up to US$7 billion from the Asian Development Bank, the World Bank, and other financial institutions, private investments, and export earnings. Sri Lanka will also engage with its foreign creditors through a debt-restructuring process to reduce its annual debt service payments, which are currently around US$6 billion per year.

The country’s reserves had dangerously dipped to US$500 million in 2021 but improved to US$2.2 billion in February 2023 after Sri Lanka stopped interest payouts and received fuel on credit from countries like India. Sri Lanka’s central bank governor blamed previous governments for borrowing excessively from global markets at commercial interest rates to finance the fiscal deficit. He said that Sri Lanka would only have access to borrow from the international market after the four-year program, and any borrowing would need to be carefully evaluated and invested in areas that generate enough foreign exchange to service the debt.

The IMF bailout was opposed by former central bank governor Ajith Nivard Cabraal, who had served as economic adviser to former president Mahinda Rajapaksa. However, as dollar reserves dipped, the island faced severe shortages of food, medicine, fertilizers, and fuel, leading to massive protests across the nation in April 2022. The protests forced President Gotabaya Rajapaksa and his brother, Prime Minister Mahinda Rajapaksa, to resign, and Mr Ranil Wickremesinghe was appointed as president. He is now leading the economic recovery efforts.