Sri Lanka to seek World Bank support alongside IMF loan program: sources

Members of the Sri Lankan Army stand guard at a Ceylon Petroleum Corporation fuel station to help stations distribute oil during the fuel crisis, in Colombo, Sri Lanka, March 22, 2022. REUTERS/Dinuka Liyanawatte/ File Photo

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COLOMBO/NEW DELHI, March 24 (Reuters) – Sri Lanka will seek assistance from the World Bank to avert a serious economic crisis in addition to an International Monetary Fund (IMF) rescue plan due to be discussed next month, two sources said.

A 70% drop in foreign exchange reserves since January 2020 has left Sri Lanka struggling to pay for essential imports including food and fuel, leading to growing unrest and even military deployments at petrol stations. Read more

With paltry $2.31 billion in reserves as of February, the country must pay off about $4 billion in debt over the rest of this year, including a $1 billion international sovereign bond due in July.

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To seek a way out of the crisis, Finance Minister Basil Rajapaksa will fly to Washington DC next month for talks with the IMF and also World Bank officials, two sources with direct knowledge of the plans told Reuters.

“What we need is budget support,” said one of the sources, referring to the financial aid that the Sri Lankan government will request from the World Bank.

The source was unable to provide the size of World Bank assistance that Sri Lanka could request.

The World Bank generally provides support to boost exports, improve economic competitiveness and help growth, the analysts said.

In heavily indebted Argentina, for example, the World Bank is working on approving a $2 billion loan package by 2022 that includes support for infrastructure, health, social inclusion and environmental projects.

Both sources, who declined to be named as the discussions were confidential, said such assistance would likely come after Sri Lanka entered an IMF-backed loan program.

In response to questions from Reuters, the World Bank said it was not currently in talks with Sri Lanka to provide budget support.

“We are working with the authorities to identify a comprehensive structural reform program necessary to ensure sustainable growth, and around which such support may be possible in the future,” the World Bank said.

Sri Lanka’s Finance Ministry did not respond to a request for comment.

‘DAMN HARD’

The amount of financing would depend on specific targets set by an IMF program as well as Sri Lanka’s trade and fiscal deficits, analysts said, estimating an annual requirement of up to $3 billion from various multilateral and bilateral sources.

“If they have a credible IMF program, there will be a period, maybe six months to a year, maybe two, where it will be very difficult,” the second source said.

“So how will people survive? That’s where institutions like the World Bank will come in with budget support.”

An IMF program is likely to focus on external debt restructuring, greater exchange rate flexibility and better targeted subsidies, which could hurt the poor, analysts said.

Transparent energy prices are also likely to increase fuel and electricity costs.

The World Bank could promote the direct transfer of subsidies, boost green energy and develop human capital through improvements in health, education and social protection, the second source said.

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Information from Uditha Jayasinghe and Devjyot Ghoshal; Edited by Sanjeev Miglani and Bradley Perrett

Our standards: The Thomson Reuters Trust Principles.

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