This move risks the continued support of the International Monetary Fund (IMF) and hampers the resolution of the country’s ongoing debt issues.

In the wake of this news, Sri Lanka’s bonds dropped by 2.5 cents. According to Reuters, Udeeshan Jonas, a chief strategist at CAL Group, said:

“Completing the IMF review by June becomes difficult now because there will have to be more talks.”

The Sri Lankan government said it mainly rejected the agreement due to the omission of a contingency should present economic pressures persist and because of the “baseline assessments” contained in the proposal. It expressed hope that discussions to resolve the issues would commence as soon as possible and acknowledged the threat of delayed IMF funding.

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In addition to the government’s agreement with its chief creditors, Sri Lanka also needed to establish an “agreement in principle” with its bondholders to obtain IMF approval for the next $337m portion of the $2.9bn scheme.

Reuters indicated that a source familiar with the matter said discussions may resume soon to avoid a delay regarding the IMF funds. This source also noted that these debt restructuring talks resemble issues experienced in similar circumstances.

Another matter of contention was a tabled suggestion that Sri Lanka links debt repayments to the country’s macroeconomic growth. In 2022, when its forex reserves plummeted, Sri Lanka experienced the toughest economic catastrophe since its independence in 1948.

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