Sri Lanka’s IMF Saga

The pulse | Economy | South Asia

Once again, the country is forced to seek an IMF bailout, with all the costs and benefits that this entails.

The current economic crisis in Sri Lanka is one of the worst the world has seen in recent times. The island nation has an unprecedented rate of inflation reaching up to 69.8 percent in September 2022.

Sri Lanka has faced a series of macroeconomic problems, eventually escalating into a humanitarian disaster in early 2022. Various mismanaged political moves, such as the election-induced tax cuts in 2019 or the sudden switch to organic farming in 2021, combined with the repeated use of external credit to mitigate Balance of Payments (BOP) crises and the COVID-induced downturn in the tourism sector combined to result in today’s massive crisis. The long lines at fuel stations across the country, the civil protests that toppled first the sitting prime minister and then the president, and the unavailability of basic goods like medicine and powdered milk give a glimpse of the tremendous economic disaster. in which the country has gotten.

In this context, while countries such as India, Bangladesh, Japan and China have provided financial and other assistance to Sri Lanka in recent months, the island nation was able to reach a preliminary agreement with the IMF for an extended period of 48 months. Funding Facility (EEF) of $2.9 billion. the IMF loan it aims to restore macroeconomic stability and debt sustainability, to unlock the growth potential of the economy. While safeguarding Sri Lanka’s financial stability and accelerating structural reforms that are crucial to addressing the country’s corruption problems, the IMF facility also aims to help the poor and vulnerable, who are disproportionately affected by the pandemic and the consequent economic crisis.

The IMF program has seven key elements:

  1. Major fiscal reforms to increase government revenue for fiscal consolidation.
  2. Fuel and electricity pricing based on cost recovery, in order to minimize the fiscal risks derived from public sector companies.
  3. An increase in social spending and an improvement in the coverage and targeting of social safety nets, helping the poor and vulnerable.
  4. Data-driven monetary policy, fiscal consolidation, phase-out of monetary financing, and strong central bank autonomy to restore price stability and allow flexible inflation targeting.
  5. Restore the flexible, market-determined exchange rate to restore foreign exchange reserves.
  6. Ensuring a healthy and adequately capitalized banking system, while improving regulatory standards and safety nets in the financial sector.
  7. Fiscal transparency, public finance management and laws/policies to reduce corruption vulnerabilities.

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Sri Lanka has had a bittersweet relationship with the IMF in the past. It has gone to the IMF for the bailout five times in the past, not counting the current EFF program, for a total of $4.9 billion in approved funds (although not all of the money was disbursed in the end).

Sri Lanka IMF Structural Adjustment Programs (2000 – 2020)

Program Duration Approved (in millions of US$) Disbursed (in millions of US$)
Standby Agreement (SBA) April 20, 2001 to September 10, 2002 256.8 256.8
Extended Fund Facility (EFF) April 18, 2003 to April 17, 2006 210.5 30.1
Poverty Reduction and Growth Fund (PRGF) April 18, 2003 to April 17, 2006 392.1 56
SBA July 24, 2009 to August 23, 2012 2572 2572
EFF June 3, 2016 to June 2, 2020 1492 1326.8

Data collected from Jayalath (1990), CBSL (1998, 2001, 2002, 2009), and IMF.

There is no denying that IMF bailouts are the worst option for any economy. IMF conditions are often difficult to meet and could put additional pressure on the domestic economy, as seen in Sri Lanka in the last decade. Given internal problems ranging from the constitutional crisis in October 2018 to multiple monsoon failures that have threatened agricultural productivity in the past decade, the economy was unable to maintain IMF-mandated budget deficits of around 5 percent of GDP, and it also failed to achieve any significant improvement in exports or economic growth. Between 2015 and 2019Sri Lankan government revenue shrank from 14.1% to 12.6% of GDP, and the growth rate plummeted from 5% to 2.9%.

However, it was important for the country’s administration to understand the depth of the current economic crisis and the consequences it could have. Sri Lanka’s lack of pragmatism with the IMF in the early stages of the crisis made matters worse and reduced its options to avoid this collapse. Indeed, former Finance Minister Basil Rajapaksa, who was instrumental in negotiating India’s aid package to Sri Lanka, It was removed days before his scheduled trip to the United States to discuss a possible rescue package with the IMF in April 2022.

The recent IMF agreement requires debt restructuring with all external and private creditors. Although the country has a December 2022 deadline for the bailout, debt relief measures cast doubt on this deadline. Japan He has been tasked with the responsibility of holding talks with Sri Lanka’s major bilateral creditors such as India and China. However, diplomatic coolness between India and China, coupled with hidden loans from China and Belt and Road Initiative (BRI) ambitions in Sri Lanka, could slow down the debt restructuring process.

As Sri Lanka and the world prepared to recover from the macroeconomic impacts of the pandemic, the Russo-Ukrainian War has added new wounds to the island nation. The conflict has not only eroded Sri Lanka’s tourist income from Russians and Eastern Europeans, who previously visited the country every year in large numbers, but has also created serious food and energy security problems due to rising prices. fuel prices and disruption to food supply chains. Bearing this in mind, although the IMF program is emerging from its previous impasse, it seems imperative to take faster action on it in the process of recovery of the Sri Lankan economy.

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