Very interesting piece! I'd argue the deep contraction is well underway since late 2022, and that it's getting reflected in increasing current account surpluses already. Gov also seems to have an expectation of a lower CA balance than the IMF does (CBSL AR) though at a stronger currency level.

Though of course, if SL truly wants to issue an ISB, the current levels won't be enough. For the exact same points you make, think very difficult for SL to actually do so once the time comes - the coupon will be far too high to justify it. If SL DOES perform well enough to justify a power coupon through higher exports for example, then that might not be an issue as a result.

The other side of the coin would be the credit situation in the private sector, which might be crowded out anyway with the 6% of GDP recapitalization needs estimated by the IMF (even if it is just a quarter of that, that would still lead to the current credit contraction continuing and then only recovering slowly). Wonder if that leads to greater development of repos and trade lending, which then encourages the export side. Possibly wishful thinking.

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Very insightful in terms of the explanation on connecting the NIR targets and expected financing flows in the IMF staff report for Sri Lanka. The adjustment and contraction is definitely already underway. In 4Q 2022, GDP contracted 12.5% and current account was a small surplus in both 3Q & 4Q. And we think a surplus is likely in 1Q 2023 as well.

Since Aug 2022 the central bank has been on monthly net purchases of FX from domestic market, absorbing just over $1 billion, with March 2023 seeing about $400mn - most of which happened even before the IMF first tranche came through. In fact about a third of the first tranche was used to repay part of an Indian credit line obtained in 2022. And we think about $800-900mn in central bank liabilities need to be repaid in rest of 2023 also - esp a swap from Bangladesh and part of the ACU trade liabilities.

I touch on some these in https://macrocolombo.substack.com/p/how-did-sri-lanka-manage-to-boost and https://macrocolombo.substack.com/p/india-as-lender-of-last-resort-to

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