IMF’s Sri Lanka, Pakistan talks in focus as $66 billion at risk

ISLAMABAD/COLOMBO: Sri Lanka is due to conclude bailout negotiations with the International Monetary Fund Thursday, just as South Asian peer Pakistan resumes talks with the multilateral lender, Bloomberg reported on Thursday.

Both nations are running out of dollars and need the IMF to either step up with cash or provide comfort to other potential creditors.

Pakistan, which needs at least $41 billion in the next 12 months to repay debt and fund imports, could see its $8.2 billion of foreign-exchange reserves rise by $2.3 billion after a loan from China. Bankrupt Sri Lanka has defaulted on repayments; it has $12.6 billion in outstanding foreign currency bonds and roughly the same amount in other non-rupee central government debt.

What’s expected immediately?

Following the close of discussions in Colombo, the IMF will issue a statement laying out the progress of talks. Key to watch would be its assessment of Sri Lanka’s debt and proposals or prescriptions to bring obligations down to “sustainable” levels. It’s unlikely that any cash will be disbursed immediately.

Pakistan is probably closer to an IMF loan. The IMF has shared draft policies, which will be assessed by Pakistani officials in order to reach a staff-level agreement in coming days, Finance Minister Miftah Ismail has said. He says the IMF could agree to pay out a total $1.9 billion. The IMF hasn’t responded to a request for comment.

Any conditions?

Once the IMF has agreed actions with Sri Lankan authorities — such as identified acceptable deficit or surplus levels — national authorities would have to work with global bondholders and bilateral creditors to whittle down existing debt. That could take the form of swapping out existing notes with new bonds that pay a lower coupon, have longer maturities, or both. More than 30 bondholders — including Amundi Asset Management and BlackRock Inc. — have formed a group with White & Case LLC and Rothschild & Co. as legal and financial advisers, respectively.

Pakistan would need to fulfill two more conditions before it receives the IMF cash. Firstly, at a scheduled review July 1, the two-month-old government would probably have to raise pump prices, after already raising them by 60 percent.

Then, to keep inflation in check, Bloomberg Economics predicts the State Bank of Pakistan will increase its policy rate by 50 basis points next quarter after 675 basis points of hikes since September, taking it to a terminal 14.25 percent.

How desperate is the situation?

Inflation data due Thursday will show price gains accelerated to 49.1 percent in Sri Lanka, according to Bloomberg Economics, which expects a 52 percent reading by September. The nation’s economy is shrinking, which makes it harder for President Gotabaya Rajapaksa to boost revenues.

Sri Lanka will restrict fuel supplies through July 10 and has asked citizens to stay at home. The island nation has also been sued in the US by bondholder Hamilton Reserve Bank Ltd., which is seeking full payment of principal and interest.

Pakistanis have been protesting against power cuts of as long as 14 hours that authorities have imposed to conserve fuel.

As part of IMF conditions, the government has raised taxes and electricity and fuel prices, which is estimated to stoke the inflation rate to 18.4 percent, second-fastest in Asia after Sri Lanka.

While Pakistan’s Finance Minister Ismail says the nation has averted a default, its debt is trading near distressed levels, indicated at about 64 cents on the dollar.

Sri Lanka’s 7.55 percent 2030 bond is trading in record low territory, at 32 cents on the dolla