Sri Lanka President Says Upending IMF Deal is Major Threat

(Bloomberg) -- Sri Lanka’s president said reopening talks with the International Monetary Fund over a bailout program would represent the biggest threat to the island nation’s economy, hitting back at his opponents who have pledged fresh dialogue with the lender. 

Speaking from his Colombo office on the eve of a closely contested election, Ranil Wickremesinghe said Friday “the greatest threat is to try and renegotiate the deal.”

Wickremesinghe, 75, brokered the $3 billion IMF loan that helped stabilize the economy after an unprecedented economic crisis in 2022 sent inflation spiraling, wiped out family savings and led to street riots that ousted the previous leader. The austerity measures and tax hikes that followed the bailout have dented Wickremesinghe’s popularity with voters as he seeks another term in office.

“I’ve been upfront with them. I’ve not been promising them things I can’t do,” he said of the criticism to the tough measures taken. “I said it’s going to be difficult before it gets better.”

The president has been campaigning on his record of bringing stability to the country. His government also negotiated a debt restructuring with creditors such as China and private bondholders after a historic default two years ago.

Wickremesinghe is in a three-way race with Anura Kumara Dissanayake, a leftist politician, and opposition leader Sajith Premadasa in Saturday’s election. Both contenders have promised to renegotiate the IMF deal to help Sri Lankans cope with rising costs that followed the bailout. 

Investors say that would be risky for the economy and financial markets. Sri Lankan stocks have slumped 13% from a May peak, while its dollar bonds are headed for their worst quarter in two years. The rupee has slipped more than 1% this month.

The 2023 deal with the IMF promised relief to Sri Lanka in exchange for debt restructuring, an overhaul in governance and other targets. Even with that deal in place, there is nothing barring a re-opening of discussions with the lender over the methods by which the IMF’s targets are met, said Nishan de Mel, executive director at Verite Research, a Colombo-based think tank. 

“There is no book of laws that says this is the only way that this can be done,” de Mel said.

Wickremesinghe was adamant that reopening talks with the IMF was the wrong thing to do.

“As soon as you say you want to renegotiate they will stop the next tranche and you will have no money and all the benefits of the deal vanishes,” he said. “It is like putting your neck onto the rail.”

Regarding the austerity measures usually attached to multilateral loans, the president said the IMF and others need to be more “sensitive” to the needs of countries in distress. However, a change in approach would require a systemic overhaul of the lenders with developing countries playing a bigger role in the IMF, World Bank and other bodies, he said.

The IMF has said the best chance for Sri Lanka to emerge from its economic crisis lies in achieving the standards agreed to with the lender. Even so, the IMF has said it’s open to different views on how to hit those targets as long as they are “realistic and achievable within the timeframe of the program.”

“It is of course up to the people of Sri Lanka to decide on the outcome in a democratic process,” Peter Breuer, senior mission chief for Sri Lanka, said in a press briefing in June. “There may be different proposals for how to achieve that, and we are willing to listen to different views on how these program objectives can be reached.”

“We are staying with the program but will look for modifications. Even the IMF has said they are open to new ideas, proposals,” Rizvie Salih, an executive committee member of Dissanayake’s NPP coalition, said on Saturday.

Wickremesinghe took over as president two years ago with the backing of his opponents as a consensus candidate after the economic crisis pushed thousands of people onto the streets and forced the former strongman leader, Gotabaya Rajapaksa to flee the country. 

“My greatest achievement has been to get the macroeconomic framework into place,” Wickremesinghe said. He cited new laws he passed that limit government borrowing as a sign of fiscal prudence.

Wickremesinghe also addressed the growing contest between the US and China for dominance in the Indian Ocean region, saying there are benefits and disadvantages for countries like Sri Lanka. 

One of the drawbacks is when small countries are asked to take “sides,” he said. He added that he’d want to see more competition between China and India for projects in the country. 

The US has invested $553 million in Colombo’s West International Terminal, which is being developed by India’s Adani Group. It’s one of America’s biggest investments in the region and a counter to China’s dominance there. 

--With assistance from Asantha Sirimanne.

(Updates with comments by member of leftist coalition in paragraph 15)

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