IMF-Sri Lanka Agreement

In News

• Recently, Sri Lanka has reached a preliminary agreement with the International Monetary Fund (IMF) for a loan of about $2.9 billion.

Background on Sri Lanka’s current financial turmoil

• It is the worst since the country’s independence from Britain in 1948. 
• Implications:
  • Sri Lankans have faced acute shortages of fuel and other basic goods.
  • unprecedented protests that forced a change in government.
  • Inflation is now at almost 65%. Food inflation rose to 93.7%.
  • The country’s reserves stood at $1.82 billion.
  • Sri Lanka needs to restructure nearly $30 billion of debt.
  • Sri Lanka will also need to strike a deal with international banks and asset managers that hold the majority of its $19 billion worth of sovereign bonds, which are now classified as in default.
• Reasons: 
  • It stems from economic mismanagement as well as the COVID-19 pandemic that has wiped out the country’s key tourism industry.
  • Years of populist tax cuts had depleted finances, which were further hammered by the pandemic.
  • The damage was compounded by a ban on chemical fertilisers that hit the farming industry.
    • It was followed by soaring oil and food prices driven by the conflict in Ukraine. 

About the agreement

• Staff-level agreement 
  • It is only the beginning of a long road ahead for Sri Lanka to emerge from the crisis.
  • The agreement is subject to approval by IMF management and its executive board and is contingent on Sri Lankan authorities following through with previously agreed measures.
• IMF conditions for the loan include: 
  • Receiving financing assurances from Sri Lanka’s official creditors and efforts by the country to reach an agreement with private creditors.
    • Its programme will aim to boost government revenue, encourage fiscal consolidation, introduce new pricing for fuel and electricity, hike social spending, bolster central bank autonomy and rebuild depleted foreign reserves.
  • The programme will implement major tax reforms: 
    • These reforms include making personal income tax more progressive and broadening the tax base for corporate income tax and VAT. 
  • The programme aims to reach a primary surplus of 2.3 percent of GDP by 2024.
  • Sri Lanka has to Increase social spending.
• Other multilateral creditors: Once the IMF package is approved, Sri Lanka is also likely receiving further financial support from other multilateral creditors.
• The objectives of the new programme:
  • To restore macroeconomic stability and debt sustainability, while safeguarding financial stability, protecting the vulnerable, and stepping up structural reforms to address corruption vulnerabilities and unlock Sri Lanka’s growth potential.
  • Rebuilding foreign reserves through restoring a market-determined and flexible exchange rate.
  • Safeguarding financial stability by ensuring a healthy and adequately capitalized banking system.
  • Reducing corruption vulnerabilities through improving fiscal transparency and public financial management. 

Country wise role

• China
  • China is a traditional friendly neighbour of Sri Lanka and a major shareholder of the IMF.
  • China has always been encouraged to play a positive role in supporting Sri Lanka’s response to current difficulties, efforts to ease debt burden and realise sustainable development.
• Japan
  • Japan will consider appropriate responses in consultation with the Government of Sri Lanka and other donor countries and organisations.
• India
  • India has been advocating for assistance to Sri Lanka.
  • Issues of creditor equitability and transparency are important.
  • Prior to the nearly-$4 billion that India extended recently in the wake of the crisis, Sri Lanka owed about $960 million to India.

Way forward

• It is important for the Government of Sri Lanka in collaboration with the IMF and Paris Club to work for the betterment of its economic and fiscal situation while securing transparency.  

Source: TH