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ECONOMYNEXT – Sri Lanka’s private credit was negative for the seventh straight month in December 2022, data showed while interest rates continued to be elevated amid a delay in an International Monetary Fund program and domestic debt re-structuring fears.

Credit to private sector has fallen 327 billion rupees to 7,426 billion rupees, helping stem a foreign exchange crisis in the past seven months.

In December private credit fell 72.6 billion rupees to 7,426 billion rupees.

Credit to state enterprises fell 25.6 billion rupees to 1,734 billion rupees. Ceylon Petroleum Corporation in 2022 borrowed from an India credit line, the proceeds of which has to be repaid to the Treasury.

Credit to government including central bank credit of 62.7 billion rupees rose by 178.5 billion rupees.

Sri Lanka has to roll-over debt at high interest rates, amid a delay in an IMF program.

Unlike in earlier currency crises triggered by mis-targeting interest rates, this time, the episode ended in external sovereign default and the IMF is not approving its program until China gives debt assurances.

India has already given debt assurances according to IMF requirements but the first Chinese communication from the Exim Bank of China has not yet been accepted by the IMF.

Related China says it will discuss Sri Lanka debt re-structuring during two-year moratorium

There is no official word on the Paris Club assurances yet.

Sri Lanka’s private creditor also wrote to the IMF last week saying they were willing to talk but raising concerns over the ability of domestic debt to reach IMF targets without re-struc

Sri Lanka’s interest rates are also elevated due to fears of domestic debt re-structuring.

Under the current debt workout of program of the IMF no cut off date is given for domestic debt re-structuring allowing rates to fall, when tax revenue and cost cutting reduces budget deficits.

Amid a delay in the IMF program and China, there has been pressure building up on the central bank to print money, which could undermine a fragile stability in the external sector.

The IMF went ahead with Ukraine without debt assurances from Russia using a so-called Most Favoured Creditor Clause (MFCC).

Sri Lanka has also been considering it, according to sources. However officials have said they are still negotiating with China. (Colombo/Feb06/2023)

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