News — ChangeLab

Sri Lanka will receive funding from the IMF to restore the country's shaky financial situation

The Executive Board of the International Monetary Fund has approved a four-year, $7 billion assistance program for Sri Lanka. The country's protracted economic crisis has led to an increase in Sri Lanka's foreign debt to $95 billion, which is about 130% of GDP. Investors see the move as necessary for Sri Lanka to revive its economy after the worst crisis in decades.

Sri Lanka is currently facing a widespread economic recession and a heightened vulnerability of the financial sector in an environment of high inflation. As of February 2022, the inflation rate in the country reached 50.6%. To overcome this crisis, Sri Lanka has had to secure debt guarantees from creditors, including India, China, and the Paris Club countries, and negotiate with private bondholders as a precondition for assistance.

During this period, Sri Lankan bondholders are keeping a close eye on developments in the country. The country's dollar-denominated bonds have yielded 20% this year, the best in the world. The rupee is up 8 percent this month and local stocks are up 5 percent as a result of the approval of billions of dollars in financial aid from the IMF.

Analysts say the funding approval for Sri Lanka will help keep its bond prices at current levels. And the answer to the question of whether to expect further growth in securities will depend on how successful the country will be in boosting its revenues. Therefore, we believe that foreign investors will increase their investments in Sri Lankan government bonds, betting that financial assistance from the IMF will free up more funds to stabilize the financial situation of the country.