Sri Lanka's deal with the International Monetary Fund (IMF) may have averted a crisis, but the bailout may undermine a key source of strength: the country's impressive economic growth rate.
The deeply indebted country inked an agreement for a $1.5 billion bailout, announced Friday, as it faced heavy fund outflows and overseas debt payments amid declining foreign-exchange reserves, which could have caused a balance of payments crisis.
Foreign-exchange reserves fell by a third from late 2014 to $6.2 billion at the end of March, Reuters reported. Meanwhile, credit rating company Moody's Investors Service, in a report last week before the IMF deal, noted that general government debt was around 76 percent of gross domestic product (GDP) in 2015, up 71.6 percent from five years earlier.
"Without an IMF loan, Sri Lanka would have been in a precarious position," Krystal Tan, an Asia economist at Capital Economics, said in a note Saturday, noting that foreign exchange reserves only covered around 80 percent of short-term external debt.
She estimated the bailout would boost reserves to around 108 percent of short-term debt, a bit above the minimum of 100 percent recommended by many economists.