Domestic Debt reworking must safeguard financial stability – IMF

The International Monetary Fund said that when Sri Lanka decides to restructure domestic debt, the island nation must make sure that it also safeguards financial stability.

Krishna Srinivasan, the IMF Director for the Asia and Pacific Department said the debt in Sri Lanka was assessed to be unsustainable and even before the IMF program for Sri Lanka was approved there was a need for a path towards restoring sustainability.

“That includes restructuring debt to all creditors — private creditors, official creditors, and to some extent, domestic debt, for the simple reason that debt sustainability is quite a big challenge in Sri Lanka. But when you restructure domestic debt, you have to make sure that you also safeguard financial stability,” he added.

“Inflation has come down, albeit from high levels. So this is again work in progress. Inflation has to come down durably because let’s not forget, inflation is the worst kind of tax on the poor and the poor and the vulnerable are hurting the most. And so you want to get inflation under control. And so that’s something which, again, in terms of monetary policy, with support of fiscal policy, has to bring inflation down to levels which are reasonable,” stressed Krishna Srinivasan.

The IMF Director for the Asia and Pacific Department said Sri Lanka is a country with a quintessential problem “Where you had twin deficit, you had a large increase in the fiscal deficits, putting pressure on the external accounts, reserves falling, exchange rate falling.” 

‘They approached the Fund for a Fund supported program, which was approved by the Board not too long ago. And that places the emphasis on one macroeconomic stabilization, bringing inflation down. Again, the fiscal consolidation is based on revenue based consolidation. That’s partly because Sri Lanka has among the lowest in terms of revenue mobilization, tax collection, and that goes back to the policy mistake they made pre pandemic, wherein they cut taxes across the board, whether it’s VAT, corporate tax, and personal income tax,” he added.

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