The International Monetary Fund (IMF) on Thursday inked a staff-level agreement with Sri Lanka on a four-year-long Extended Fund Facility with $2.9 billion in special drawing rights that is centred around fiscal consolidation, debt restructuring, inflation reduction, and structural reforms.
The aid is conditional on financial assurances and “good faith effort” from Sri Lanka’s creditors, primarily India, China, and Japan, in the form of collaborative debt relief plans to improve the country’s creditworthiness and repayment capacity.
IMF mission heads Peter Breuer and Masahiro Nozaki blamed Sri Lanka’s “acute crisis” on: insufficient foreign exchange reserves; economic mismanagement; shortages of food, fuel, and medicines; skyrocketing inflation; and poor revenue mobilisation. Against this backdrop, they reaffirmed that the rescue package will “stabilise the economy, protect the livelihoods of the Sri Lankan people, and prepare the ground for economic recovery by promoting sustainable and inclusive growth.”
We have taken the First step towards recovery by reaching a staff-level agreement with the IMF. They have pledged to support an economic recovery plan that will ensure that social-sector spending will not be affected by economic setbacks.
— Ranil Wickremesinghe (@RW_UNP) September 1, 2022
Sri Lankan President Ranil Wickremesinghe welcomed the IMF deal as the “beginning of a new economic era,” that would tackle the country’s bankruptcy crisis and inflating debt by instating a more export-oriented economy in order to sustain its social welfare model. He added that such a commitment will ensure that the nation would “not have any further setbacks.”
Thursday’s staff level agreement with the Sri Lankan government follows Breuer and Nozaki’s week-long visit to Colombo to discuss a possible bailout for the island nation.
IMF deal with Sri Lanka is contingent on restructuring its debt. Focus has been on China & Japan but nearly half is owned by private creditors, largely Western financial firms. Creditors have human rights duty to strike deal to mitigate impact of crisis. https://t.co/nfgUU9QhbC
— Sarah Saadoun (@sarah_saadoun) September 1, 2022
Key elements of the recovery package include the implementation of tax reforms to raise public revenue to 2.3% of GDP by 2025, flexible inflation targeting to address surging food and fuel prices, enhancing welfare expenditure, banking sector reforms, exchange rate stabilisation, and anti-corruption measures.
In order to secure the bailout deal, Wickremesinghe had two days earlier presented an interim budget announcing measures to boost tax revenues, reduce capital expenditure, tackle inflationary pressures, and bolster relief programs. The president asserted that the budgetary proposals would raise government revenue to 15% of GDP.
Breuer lauded the budget announcement as a “credible device to show creditors that Sri Lanka is serious about engaging in reforms.” He added that besides job cuts and austerity measures, Colombo will also need to acquire financial support from multilateral organisations and private creditors to restructure its current outstanding debt obligations of over $50 billion.
The road ahead will be difficult but as we continue, we will make progress. It's our commitment that matters now. We must not only fulfil goals set forth but also surpass them. Let us orient ourselves to a new export economy enabling us to sustain our social services without fail
— Ranil Wickremesinghe (@RW_UNP) September 1, 2022
He thus advised the government to “move expeditiously” in availing collaboration agreements with creditors to “avoid the crisis becoming worse,” stressing that “if creditors are not willing to provide these assurances, that would indeed deepen the crisis here in Sri Lanka and would undermine its repayment capacity.”
To this end, key foreign creditors including India and Japan have offered debt relief packages to the island nation. India, for instance, has extended over $4 billion in currency swaps, lines of credit, food and diesel deliveries, and debt moratoriums since the start of the year. Likewise, Japan called for a conference of creditors last week to help restructure Sri Lankan debt.
About #SriLankaCrisis and IMF debt package:
— Regina Dulanjali (@ReginaDulanjali) September 1, 2022
Basically China, Japan, and other creditors of Sri Lanka still need to come on board and agree to debt relief measures in line with IMF program. Else Sri Lanka is not getting any money from IMF, not even if IMF staff agrees to anything
However, the most crucial role remains that of China, to whom Sri Lanka owes around 20% of its foreign debt. “Ultimately, it’s about China,” analysts point out, noting that Chinese debt is “the largest, the most opaque, and the most complex.”
This has been seconded by Breuer, who emphasised that the IMF has no role to play in bilateral debt negotiations, more so since China is not a part of the Paris Club of creditors, which makes Sri Lanka’s debt crisis a “special situation.” In this respect, the actual disbursal of IMF funds could actually be weeks or months away.
Sri Lanka is in the midst of a prolonged economic crisis attributable to populist tax cuts, poorly thought-out policies such as a ban on chemical fertiliser imports, extravagant expenditure on infrastructure projects, and high levels of sovereign debt. All of this has been exacerbated by the devastating impact of the COVID-19 pandemic, which severely damaged the country’s vital tourism sector, and the Ukraine war, which fuelled a further rise in the prices of critical goods.
Protestors in Sri Lanka were arrested as protests continue. The government appears to be totally incompetent. It’s unable to do anything except try to pass the begging bowl to the IMF. The situation is going from bad to worse. pic.twitter.com/pas7fjBuly
— Steve Hanke (@steve_hanke) September 1, 2022
Shortages of food, fuel, medicines, cooking gas, and other basic amenities have incited major public protests since the start of the year, with demonstrators demanding the resignation of now-former President Gotabaya Rajapaksa. Though Rajapaksa has stepped down, many argue that his replacement, Wickremesinghe, is merely an extension of the same government. The new administration has been accused of stifling dissent and using heavy-handed measures to shut down protests and punish protesters.
Keeping this in mind, Breuer noted that there is a “long road ahead for Sri Lanka to emerge from the ongoing crisis,” with food and transportation prices up 94% and 150%, respectively. The country has also been facing lengthy power outages.
Former Sri Lankan Central Bank Deputy Governor W. A. Wijewardena has thus cautioned that pursuing economic reforms will require a strong political will to address the country’s multifaceted challenges. He underscored that the Wickremesinghe government must proceed with a “specifically set-out timeline with milestones at each point” to stick to the conditions of the IMF package.