IMF-Sri Lanka Agreement

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    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.  

    International Monetary Fund

    • It was established in 1944 in the aftermath of the Great Depression of the 1930s.
    • IMF and the World Bank are also known as the Bretton Woods twins because both were agreed to be set up at a conference in Bretton Woods in the US.
    • It is governed by and accountable to the 190 countries that make up its near-global membership.
    • India became a member in December 1945.
    • Aim: To ensure the stability of the international monetary system (the system of exchange rates and international payments) which enables countries and their citizens) to transact with each other.
      • Its mandate was updated in 2012 to include all macroeconomic and financial sector issues that bear on global stability.
    • Financing: The IMF’s resources mainly come from the money that countries pay as their capital subscription (quotas) when they become members.
      • Each member of the IMF is assigned a quota, based broadly on its relative position in the world economy.
      • Countries can then borrow from this pool when they fall into financial difficulty.
    • Publications:
      • World Economic Outlook
      • Global Financial Stability Report
      • Fiscal Monitor
      • Global Policy Agenda  

    Source: TH