IMF confirms India’s finance assurances for Sri Lanka

Source: The post is based on the article “IMF confirms India’s finance assurances for Sri Lanka” published in The Hindu on 23rd January 2023.

What is the News?

The International Monetary Fund(IMF) has confirmed receiving India’s written financing assurance in support of Sri Lanka’s economic revival.

Why is Sri Lanka seeking IMF assistance?

Sri Lanka is grappling with challenges during the past year ranging from a shortage of foreign currency to runaway inflation and a steep recession – the worst such crisis since its independence from Britain in 1948.

Due to this, Sri Lanka has decided to seek IMF assistance and reached a staff-level agreement in September 2022. 

India, China and Japan are Sri Lanka’s three largest bilateral creditors — to send written financing assurances to the IMF strongly supporting Sri Lanka’s debt restructuring plan.

As part of the plan, none of the official lenders would take a haircut while giving Sri Lanka time to recover with an IMF programme.

However, private creditors, who hold the largest chunk of Sri Lanka’s foreign debt, may have to take a haircut.

Note: According to World Bank estimates, Sri Lanka has an external debt burden of more than $52bn as of December. Of that, nearly 40% is owed to private creditors, including financial institutions, while the rest is owed to bilateral creditors where China (52%), Japan (19%) and India (12%) are the largest ones.

What is Haircut?

When a bank takes a ‘haircut’, it means it accepts less than what was due in a particular loan account. For example: if a bank was owed Rs 10,000 by a borrower, and it agrees to take back only Rs 8,000, it takes a 20% haircut. Banks do this for accounts where chances of making a full recovery are bleak.