The economic situation in Sri Lanka has improved a notch under current President Ranil Wickremesinghe, but the country had been waiting eagerly for announcement of the bailout from the International Monetary Fund (IMF) that it hoped would help it tide over the worst economic crisis in its history. The 20 March announcement of the IMF’s Extended Fund Facility (EFF) of $2.9 billion for Sri Lanka, of which about $330 million was disbursed immediately to alleviate the country’s humanitarian crisis, came as a shot in the arm for Sri Lanka’s embattled government.
The approval of the EFF, even if the quantum of the package is modest, will help Colombo restore some of its credibility with international private creditors and is expected to open up financial support from other institutions. However, reactions from Sri Lanka on the IMF bailout package have been mixed. The relief at no longer being a bankrupt country has been tempered with foreboding about the fate of the common man as the conditions stipulated by the IMF are expected to have the most severe impact on this substantial section of the country’s population.
It is the 17th time in its history that Sri Lanka has required an IMF financing program. The 48-month extended arrangement will provide a much-needed injection of capital to fund essential imports and provide policy space for the Sri Lankan government to stimulate economic growth and facilitate structural reforms. Furthermore, President Wickremesinghe has announced that the approval of this IMF loan will enable the government to access over $7 billion in overall funding from other multilateral creditors and restore the confidence of stakeholders in Sri Lanka.
Michael Iveson, Research Fellow at the Lakshman Kadirgamar Institute of International Relations and Strategic Studies, wrote in the Diplomat that the EFF arrangement comes with strict conditionalities for economic reform. The official press release from the IMF executive board announcing the Sri Lankan EFF stated that “Ambitious revenue-based fiscal consolidation is necessary for restoring fiscal and debt sustainability”. The IMF demands that the Sri Lankan government reform its tax mechanisms and manage expenditure to tackle persistent budget deficits and bring spending in line with income.
The IMF also urged the government to continue its implementation of progressive tax reforms. Ahead of the first IMF review in six months, Sri Lanka must begin debt restructuring discussions with bilateral and private creditors. Sri Lanka had received support guarantees from India, Japan, and earlier this month, after a long delay, from China, prior to the IMF program approval, and the government aims to announce its debt restructuring strategy in April.
The IMF on 21 March said that in the first case of an Asian country facing scrutiny for corruption as part of a bailout program, it is assessing Sri Lanka’s governance. Peter Breuer, the senior mission chief for the IMF in Sri Lanka said the development lender would assess corruption and governance vulnerabilities in Sri Lanka and provide recommendations. He told reporters that “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 on this critical reform area”.
Reacting to news about the approval of the EFF, President Wickremesinghe said in a video statement that “Sri Lanka is no longer deemed bankrupt by the world. The loan facility serves as an assurance from the international community that Sri Lanka has the capacity to restructure its debt and resume normal transactions. From the very start, we committed to full transparency in all our discussions with financial institutions and with our creditors”. He tweeted on 21 March that “In the 75 years of Sri Lanka’s independence, there has never been a more critical period for our economic future. IMF Executive Board approved our programme, enabling Sri Lanka to access up to $7b in funding from IMF & IFIs. I thank the IMF & our international partners for support”.
Pledging to “get the economy back on track for the long term through prudent fiscal management and our ambitious reform agenda”, he commented that he had made some tough decisions to ensure stability and debt sustainability and to grow an inclusive and internationally attractive economy. The President also said that “As our foreign currency improves, we will gradually lift import restrictions. In the first cycle we will bring in essential goods, medicines and goods needed for the tourism industry”.
Wickremesinghe informed the Sri Lankan parliament on 22 March that the first tranche of the bailout package from the IMF had been received by the country. He noted that “This sets the stage for Sri Lanka to have better fiscal discipline and improved governance”. He said that officials from his government will kick off the next round of talks with bondholders and bilateral creditors in the third week of April, adding that “This will create opportunities for low-interest credit, restore foreign investors’ confidence and lay the foundation for a strong new economy”. Unlike previous bailouts, which were mainly used to bolster foreign exchange reserves, the funds from the current programme can also be used for government spending, senior IMF official Masahiro Nozaki informed. Importantly, the IMF bailout is expected to catalyze additional support to the tune of $3.75 billion from the likes of the World Bank, the Asian Development Bank and other lenders.
The Sri Lankan government, meanwhile, made it clear that it is cognizant of the massive challenges that lie ahead despite the IMF bailout. Wickremesinghe told lawmakers that the IMF loan was only the first step towards difficult structural reforms. He stressed that “The IMF loan is not an end in itself, this is the beginning of a long and more difficult journey. We have to traverse it with care and courage. The only objective is to rebuild the economy”. Shehan Semasinghe, State Minister of Finance, shared Wickremesinghe’s views when he described the IMF bailout as “absolutely essential”, and added that Sri Lanka was ready to engage in restructuring talks with bilateral and private creditors to recover debt sustainability as “soon as possible”. He cautioned that “But now we have to patiently focus on very difficult reforms going ahead”.
Meanwhile, problems on the domestic front have persisted for President Wickremesinghe. The Indian Express observed that he has been facing criticism from Sri Lanka’s main opposition parties as well as from civil society groups and trade unions who led last year’s Aragalaya Movement that led to a dramatic change in the country’s political leadership, and catapulted Wickremesinghe to the top job. Wickremesinghe has been accused of using high-handed methods to contain the protests, including the arbitrary arrests of a number of activists. He has also put off holding local body elections citing the lack of funds, though opposition parties believe the postponement was due to Wickremesinghe’s lack of confidence that his side – which comprises the ousted Rajapakasas and their party, the Sri Lanka Podujana Peramuna (SLPP) – would be able to win.
The IMF is awake to the challenges that lie ahead for Colombo. IMF Managing Director Kristalina Georgieva conveyed this in a statement in which she stressed that “Sri Lanka has been facing tremendous economic and social challenges with a severe recession amid high inflation, depleted reserves, an unsustainable public debt, and heightened financial sector vulnerabilities. Institutions and governance frameworks require deep reforms”.
She added that “Having obtained specific and credible financing assurances from major official bilateral creditors, it is now important for the authorities and creditors to make swift progress towards restoring debt sustainability consistent with the IMF-supported program”. Georgieva said that “For Sri Lanka to overcome the crisis, swift and timely implementation of the EFF-supported program with strong ownership for the reforms is critical”, and that “Ambitious revenue-based fiscal consolidation is necessary for restoring fiscal and debt sustainability. For the fiscal adjustments to be successful, sustained fiscal institutional reforms on tax administration, public financial and expenditure management, and energy pricing are critical”.
She aptly advised that “In this regard, the momentum of ongoing progressive tax reforms should be maintained, and social safety nets should be strengthened and better targeted to the poor”. Commenting that “The authorities’ commitments to transparently achieve a debt resolution, consistent with the program parameters and equitable burden sharing among creditors in a timely fashion, are welcome”, Georgieva underlined that the country’s ongoing efforts to tackle corruption should continue, including revamping anti-corruption legislation.
Krishna Srinivasan, director of the IMF’s Asia and Pacific department, told CNBC that Sri Lanka’s present strife was a “slightly different crisis than what we have seen in the past”. He was of the view that “There is broad recognition of the fact that debt sustainability needs to be restored. There is broad agreement that this will require fiscal consolidation on the part of the government. We do see a significant amount of ownership and there has to be a significant amount of leadership, so that there is buy-in for this whole program”. Srinivasan underlined that “This will be something where society at large will have to play an important role, along with all other stakeholders, including the political actors”.
Many in Sri Lanka are convinced that the IMF bailout will only make things worse for the country’s people. Between 1965 and 2016, Sri Lanka had availed IMF bailouts as many as 16 times. Of these 16 occasions, the programme was fully implemented only nine times. According to a study conducted by Professor Prema-Chandra Athukorala and published in Daily FT, the growth rate of the economy was significantly higher during the years of fully-implemented IMF programs. However, the impact of the growth achieved during the IMF programme years did not percolate beyond the programme years. In other words, IMF programmes in the past have failed to provide sustainable solutions to economic recovery in the long run. Many argue that despite availing the IMF assistance 16 times, the long-standing basic macroeconomic imbalances of the country have remained.
The IMF also believes that given the “complex debt restructuring process, unfavourable external environment, elevated risks of persistently high inflation, and challenging political and social situation, the programme implementation faces a high risk”. Dr. Gulbin Sultana argued in her commentary in the Financial Express that even if the present IMF programme is fully implemented, there is a high probability of a sharp rise in poverty and unemployment during the programme period.
Conditions under the IMF programme such as ensuring austerity measures and restructuring of public enterprises involve the risks of an increase in unemployment and poverty if an effective safety net for the needy is not in place. Hence, instead of looking at the IMF package as the most important solution to address the ongoing economic crisis, the Sri Lankan government must consider it as one of the many measures and must focus on other measures too.
As Katrina Ell, senior economist at Moody’s Analytics told Reuters, “We need to keep in mind that it’s still going to be a difficult road no matter how much potential funds or support is being thrown at Sri Lanka. Ultimately, it comes down to them being able to successfully address some of the systemic problems in terms of economic management, fiscal management”.
While there is little doubt that Sri Lanka’s grave economic situation had left it with little option but to seek an IMF bailout, amidst grim reports such as that of Save the Children released earlier this month that found that half of Sri Lanka’s families had been forced to reduce portions in the meals they fed to their children, it is imperative that the Sri Lanka government ensures that strong social safety nets are established to protect the poorest households from the IMF-mandated austerity measures.