Sri Lanka’s debt targets by the International Monetary Fund (IMF) will expose it to a higher risk of future debt crisis as the country will exit the programme in 2027 with public debt over 100% of GDP while intending to raise $ 1.5 billion annually from dollar bonds, a global sovereign debt expert said.
According to Senior Fellow at the US-based independent think tank Council on Foreign Relations (CFR) Brad Setser, IMF’s targets for Sri Lanka are off, and they would leave Sri Lanka exposed to a high risk of a future debt crisis.
“The notion that Sri Lanka can safely raise $ 1.5 billion a year in the bond market from 2027 with public debt-to-GDP of over 100% and external public debt of over 50% is quite simply a recipe for future default – and for ‘new’ bonds that trade badly after the restructuring,” said Setser in his blog post published by CFR.
He said that Sri Lanka needs to get its public debt-to-GDP down to around 110% of its forecast GDP by the end of its IMF programme in 2027.
Moreover, he said that the IMF doesn’t explicitly set out the path of Sri Lanka’s external public and publicly guaranteed debt-to-GDP and that the IMF has concluded that only public debt-to-GDP matters for market-access countries, leaving no explicit analysis of Sri Lanka’s external debt levels at the end of its IMF programme.
“There is literally no assessment of Sri Lanka’s external debt in the IMF’s debt sustainability analysis – and the IMF considers this a feature, not a bug.” Setser said.
He said that based on the new fiscal financing from the Multilateral Development Banks(MDBs) of $ 5 billion during the IMF programme period, possibility of significant share of Sri Lanka’s past-due interest be honoured and capitalising additional interest between 2025 and 2027, country’s external foreign currency debt seems set to rise to about $ 50 billion in 2027.
“Depending on the evolution of Sri Lanka’s dollar GDP (a point of dispute with Sri Lanka’s bondholder committee), that would put external debt between 50% and 60% of GDP. That is quite a high number for a country that is forecast to be returning to market borrowing in 2027 and that can make significant amortisation payments from 2028 on.” he added.
Further, he said Sri Lanka’s external debt service isn’t specified, as the IMF doesn’t use ‘external debt’ as a concept in its debt analysis for market-access countries.
But he noted that the 4.5% of GDP foreign currency financing need constraint functionally limits external debt service, and it works out to be 30% of 2027 revenue.
“To summarise, Sri Lanka – as assessed under the IMF’s market access framework – was judged able to support significantly more debt (versus GDP) than Ghana or Zambia, despite having a smaller revenue base. It was also judged by the IMF’s model as capable of supporting significantly more external debt (versus GDP) than Zambia or Ghana, even though it has a significantly smaller export base.” Setser said.