The International Monetary Fund (IMF) hopes to complete rescue talks with Sri Lanka “As quickly as possible,” Managing Director Kristalina Georgieva said on Wednesday (20), hours before the crisis-hit South Asian nation elected a new President.
Speaking with Nikkei Asia in Tokyo, Georgieva said the fund was “Very deeply concerned about the well-being of the people in Sri Lanka,” which has been gripped by severe shortages of food, fuel, and other essentials after its foreign reserves dried up.
Frustrated citizens have turned their anger on the Government, clouding the outlook for debt restructuring and driving once-powerful President Gotabaya Rajapaksa to go into exile and resign last week. On Wednesday, the Sri Lankan Parliament elected Ranil Wickremesinghe as his replacement.
Georgieva vowed that “The moment there is a government that we can continue our discussions with, our team will be there.” She added that she was “Very hopeful that based on the good technical work we have already done, and the fact that this technical team of Sri Lanka is there, we can complete program negotiations as quickly as possible.”
Wickremesinghe is no stranger to the IMF, as a Finance Minister and six-time Prime Minister who has had a hand in negotiations. But he is deeply unpopular with the public.
Georgieva said that the IMF would work with any Sri Lankan Administration “As long as the next leader enjoys support and has the longevity to lead the country.”
Sri Lanka is not the only South Asian country facing serious economic pressure. Others include Pakistan, with which the IMF recently reached a staff-level agreement to extend about $1.2 billion in aid, and the Maldives, whose debt-to-gross domestic product ratio stood 123.4% last year according to the IMF’s estimate.
“It is very important for all countries that have had that burden to stare it in the face and not pretend that somehow the problem can go away,” Georgieva warned. “Because it won’t.”
The Managing Director, who was stopping in the Japanese Capital after attending the Group of 20 Finance Ministers meeting in Indonesia last week, went on to say: “Countries that are faced with severe problems of bad management need to understand that, in this context, markets are jittery. Sentiment is such that there is more anxiety. So if you need to be prudent in good times, you have to be even more prudent in bad times where we are today.”
In the case of Sri Lanka, which “Pre-emptively” defaulted on its foreign debt for the first time earlier this year after COVID-19 devastated its core tourism sector, the Government was due to submit a debt restructuring plan to the IMF by next month.
“What we would need for the programme is financial assurances that will be sustainable, not immediately, but that we have a credible plan to get to that point,” Georgieva said. She added that the incoming Government has “A very important role to play, reaching out to both bilateral creditors and private-sector creditors.”
Sri Lanka’s large creditors include China, India, and Japan. Georgieva said that she has discussed the situation with the countries during her Asia trip, and was encouraged because “There is an understanding that protracted negotiations are simply not viable, that there has to be decisive action as early as the weeks after a [New] Government is in place.”
More broadly, on the global economy, Georgieva said that the IMF will further lower its projection for global GDP growth when it releases its latest World Economic Outlook on July 26. This will mark the third downgrade this year alone. In April, the IMF lowered the outlook for 2022 to 3.6% from 4.4% in January.
She said that the new growth projections would remain in positive territory both for 2022 and 2023. But the downside risks, such as the Ukraine war and inflation, “Remain very present.”
“The risk of recession has gone up,” she said.
Georgieva said there will be a “Quite significant downgrade” for China, from its 4.4% growth forecast in the IMF’s April projections due to the impact of COVID-19 lockdowns and real estate problems.
She noted that Beijing has started to use monetary as well as fiscal policy levers, but said the question is “How quickly they can produce results.”
When asked about the weakening Japanese yen and the Bank of Japan’s monetary policy, she pointed out that Japan is an export-oriented economy. Hence, the exchange rate is helping Japanese exporters.
“The economy is not yet achieving its inflation target [of 2%] in a sustained manner,” she said. “And therefore, monetary policy accommodation remains the right choice.”