Sri Lanka to replace 'unrealistic' budget, in talks to extend World Bank aid

Protesters in an anti-government demonstration near the president's office in Colombo, Sri Lanka, on May 2, 2022. PHOTO: AFP

COLOMBO (REUTERS, XINHUA) - Sri Lanka plans to replace its current "unrealistic" budget and is in talks with the World Bank to extend its support by US$300 million (S$415 million) to US$700 million, the country's finance minister said on Wednesday (May 4).

The island nation, hit hard by Covid-19 and short of revenue after steep tax cuts by President Gotabaya Rajapaksa's government, is critically short of foreign exchange and has sought an emergency bailout from the International Monetary Fund (IMF).

Finance Minister Ali Sabry told Parliament on Wednesday that the country’s current useable foreign reserves were less than US$50 million, compared against US$7 billion at the end of 2019.

He said that Sri Lanka should have sought assistance from the IMF much earlier and that entering an IMF programme would take at least six months.

The government should have floated the rupee earlier too, said Mr Sabry.

Rampant inflation and shortages of imported food, fuel and medicine have led to weeks of protests that have occasionally turned violent.

"The existing budget is unrealistic, given our challenges," Mr Sabry told a Parliament session.

"We will bring in a new budget that will seek to address core issues of low public revenue."

Mr Sabry said he wanted to increase tax revenue as a share of gross domestic product to 14 per cent within the next two years, from 8.7 per cent now.

Sri Lanka will appoint within the next two weeks financial and legal advisers for a proposed restructure of its sovereign debt, he said, adding that the government was keen to work with the IMF on structural reforms.

"This is the only way to put the economy on a sustainable footing," he said.

On Monday, the country’s Power and Energy Minister Kanchana Wijesekera said Sri Lanka has extended a credit line with India by US$200 million in order to procure emergency fuel stocks.

Colombo was also in talks with New Delhi over extending the credit line by an additional US$500 million, Mr Wijesekera told a news conference, with four fuel shipments due to arrive in May.

Sri Lanka has used US$400 million, on multiple shipments in April, of the US$500 million credit line extended by India earlier this year, Mr Wijesekera said. Two fuel shipments will be paid for from the remaining funds in May.

“The Indian credit line was extended by US$200 million recently and this will be utilised for four shipments in May. Talks are continuing for a further US$500 million with India so in total the credit line will be US$1.2 billion,” Mr Wijesekera said.

Meanwhile Beijing’s ambassador Qi Zhenhong told Mr Sabry at a meeting on Monday that China – one of the island’s largest bilateral lenders, having extended about US$6.5 billion in loans – supports its decision to work with the IMF to restructure its debt.

“Ambassador Zhenhong also assured Minister Ali Sabry that as a major shareholder of the IMF, China is willing to play an active role in encouraging the IMF to positively consider Sri Lanka’s position and to reach an agreement as soon as possible,” Sri Lanka’s Finance Ministry said in a statement.

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