LONDON/COLOMBO (Askume) – Sri Lanka’s election on Saturday has raised questions about when a long-awaited debt deal with bondholders will be finalised, whether it can meet the International Monetary Fund’s programme targets and whether the president is willing to make a change.
The two main contenders for the presidency, opposition leader Sajith Premadasa and Marxist-minded lawmaker Anura Kumara Dissanayake, have said there is interest in reconsidering the International Monetary Fund’s $2.9 billion Sri Lanka bailout package.
Sri Lanka has been struggling since suicide bombings in 2019 hit the tourism industry, worsening overspending and stunting growth. Less than a year later, the COVID-19 pandemic and subsequent surge in global food and fuel prices, as well as rising interest rates, have pushed its economy into the abyss.
Sri Lanka failed to repay its debt in April 2022, leading to protests and President Gotabaya Rajapaksa stepping down. Since then, voters have faced years of hardship.
However, under President Ranil Wickremesinghe, who will take office in 2022, the signs are beginning to change.
“Everyone in Sri Lanka, whether politicians, the upper class, the middle class or the lower class, sees the economy returning to a path of stability and recovery,” said Clifford Lau, portfolio manager at William Blair.
“All this will be possible only if the IMF agreement becomes the core of the country’s reconstruction,” Liu said.
Sri Lanka’s economy is expected to grow 3% this year, reversing last year’s contraction, while inflation peaked at 70% in September 2022 before easing to 0.5% in August.
Crucial foreign exchange reserves — once so low that Sri Lanka ran out of fuel and medicines — have now risen to $6 billion.
Thelema’s Patrick Curran said: “The government is currently doing a better job than most would like to achieve, but clearly the sustainability of policy really depends on the outcome of the election.”
Curran said a change in strategy “could be extremely disruptive to economic recovery and restructuring”.
Wickremesinghe, one of the 38 presidential candidates, is in third place after Samadhi Jana Balawegaya leader Premadasa and Dissanayake, president of the Marxist-leaning Nation People’s Power Party.
Premadasa called on the International Monetary Fund to make changes to programmes and tax reforms to reduce the cost of living.
Liu said a potential disruption to the IMF’s reopening deal — and the target adjustments needed to release more funds — would be so disruptive that he believes it is unlikely to happen.
Citi analysts said Dissanayake’s win increased the risk of a delay in the IMF review, which could lead to the release of funds and create a “greater likelihood of renegotiation of the loan agreement”.
Liu and other analysts said that if one of the challengers wins, debt negotiations will almost certainly last for months.
Sri Lanka signed a $10 billion debt restructuring deal with official lenders Japan, China and India in June.
Colombo on Thursday reached a last-minute deal with bondholders to revise the restructuring of $12.5 billion of international bonds to secure crucial approval from the International Monetary Fund – a key part of the country’s bid to emerge from default.
But bondholder deals are particularly vulnerable because the new administration could seek amendments or even cancel them in search of a better offer.
“If a new administration comes in and wants to fundamentally revise the IMF program, the restructuring could be further delayed,” said Chris Celio, senior economist and strategist at Promeritum Investment Management LLP.
Without an agreement, Sri Lanka will be in a dangerous situation.
Mark Ledger-Evans, portfolio manager at Ninety One, said: “Sri Lanka is officially in default and will remain so until this matter is resolved. So access to global capital is more limited than otherwise.”
While the winner of the vote will also determine the timing of mandatory parliamentary elections, another source of uncertainty is that investors and observers say Sri Lanka’s fragile recovery may prevent them from taking drastic steps.
Telemer’s Curran said the improved revenue performance means the new government will also have some headroom.
“But the risk is that they go further.”
