IMF’s Package to Sri Lanka Includes Corruption Fixing

On March 20, the International Monetary Fund (IMF) extended $2.9 billion Expanded Fund Facility (EFF) to support Sri Lanka.

The approval is expected to pave the way for other financial institutions to extend their support to the bankrupt South Asian country.

A major issue that IMF officials raised when announcing EFF support for Sri Lanka was government corruption. The IMF would assess corruption and provide recommendations. Sri Lanka has become the first Asian country to undergo a comprehensive governance diagnostic exercise.

According to those who support the agreement and the path outlined by the IMF, this exercise is supposed to be a valuable tool to improve the governance and economic systems of the country. However, critics, including human rights organizations and left-wing political parties, express skepticism, arguing that these measures are designed to justify and legitimize the implementation of austerity policies.

Sri Lanka has been in talks with the IMF since early 2022, following the worst economic crisis it has faced since independence, and embarked on a series of reforms following IMF recommendations.

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This is not the first time that Sri Lanka has requested IMF assistance. It received IMF financing four times between 1965 and 1969, twice between 1971 and 1974, four times between 1977 and 1988, once in 1991, four times between 2001 and 2009, and finally in 2016.

However, Sri Lanka has not previously faced an economic disaster of this magnitude, nor has it been subject to conditions as stringent as those imposed in the current IMF agreement.

The day after the agreement was announced, President Ranil Wickremesinghe told parliament that Sri Lanka is no longer a bankrupt nation and that they have received the first tranche of funds, $333 million. Wickremesinghe insisted that they hope to access another $7 billion of “quick credit support” from various multilateral sources, including the World Bank and the Asian Development Bank. Another $7 billion will bring Sri Lanka’s foreign debt to $62 billion.

The president also stressed that the IMF financing sends a signal to the world that Sri Lanka is moving forward with an economic recovery plan and gives Sri Lankan banks access to international financial institutions. In its speechWickremesinghe also said that significant changes would be made to the way the nation is governed, its fiscal and monetary policy, tax regime, corruption mechanisms, etc.

As the president told Parliament, the IMF money came with a number of conditions. At the press conference announcing the deal, Breuer saying that the IMF has emphasized that anti-corruption and governance reforms are central pillars of the program. He added that the IMF will put Sri Lanka through a comprehensive governance diagnostic exercise, making it the first Asian economy to undergo such an exercise.

What is a governance diagnostic exercise?

Delivering opening remarks at the press conference on the approval of the Expanded Fund Facility (EPF) Arrangement by the IMF Executive Board for Sri Lanka, representatives of the IMF saying that it is “indispensable to ensure that the hard-won gains of the reforms benefit the people of Sri Lanka” and that the government has agreed to “fundamentally improve public financial management and strengthen the anti-corruption legal framework in line with the UN Convention United against Corruption.”

“In addition, the IMF is conducting an in-depth governance diagnostic exercise, which will assess corruption and governance vulnerabilities in Sri Lanka and provide prioritized and sequenced recommendations. Sri Lanka will be the first country in Asia to undergo a governance diagnostic exercise by the IMF. We look forward to further engagement and collaboration with stakeholders and civil society organizations in this critical area of ​​reform,” IMF officials said.

In recent years, the IMF has conducted such governance diagnostic exercises in moldovahe Republic of Congo, Mauritania and Zambia. The reports on Moldova, the Republic of the Congo and Zambia are online and one on Mauritania will be published soon.

The IMF views these assessments as tools that countries can use to establish effective governance mechanisms and improve the rule of law. In all three countries, the IMF teams analyzed the governance of the central bank, the financial sector, the fiscal sector, the protection of contracts and property rights, the tax regime, and the fight against money laundering. Given what both the IMF and the President have said, it’s pretty clear that the exercise on Sri Lanka would consider the same things.

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the IMF state that “When a country borrows from the IMF, the government agrees to adjust its economic policies to overcome the problems that led it to seek financial assistance. These policy adjustments are conditions for IMF loans and help ensure that the country adopts strong and effective policies.

The organization insists that these conditions help countries to solve balance of payments problems “without resorting to measures that harm national or international prosperity.”

There is a growing body of evidence suggesting that the implementation of reforms attached to IMF lending often leads to increased labor rights violations, domestic violence, and repression. It is particularly pertinent to note that the Sri Lankan government is currently taking steps to fully implement the IMF reforms, which has resulted in the approval of the sale of several state-owned companies that are profitable. This decision is based on the premise that the state should not get involved in business. However, this has led a number of unions to start strikeswhich in turn has prompted the deployment of the military forces to quell industrial action. These developments are cause for concern, particularly with regard to their potential implications for human rights and labor standards in Sri Lanka.

Commenting on the deal with the IMF, Amnesty International Senior Director Deprose Muchena, who is currently in Sri Lanka to present her 2023 report on human rights, said the IMF’s recommendations have often led to a decline in welfare. of people.

Muchena told The Diplomat that he is not aware of the details of the IMF’s governance diagnostic exercise in Sri Lanka, but that he will meet with IMF representatives within the week to gather information on the deal.

The IMF typically places restrictions on a government’s fiscal and monetary policy, and this often prevents governments from taking the necessary steps to finance welfare, he said.

“In 2022, there were mass protests in Sri Lanka. A call was made for transparency, good governance and human rights and these demands must be respected. Any deal with the IMF must not violate people’s rights,” he said.

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