Colombo Sri Lanka (Commonwealth Union)_The much-awaited and anticipated bailout package of USD 3 billion for the economically beleaguered island nation of Sri Lanka was approved yesterday by the International Monetary Fund. The Executive Board of the IMF approved the 48-month Extended Fund Facility Arrangement which will not just enable an immediate disbursement equivalent to about USD 333 billion but also catalyse financial support from other development partners. The programme also allows Sri Lanka access to financing of upto USD 7 billion from the IMF and germane multilateral organisations.
The EFF-supported programme will help restore stability across multiple areas including macroeconomic stability and debt sustainability, financial stability and the establishment of structural reforms which together, will unlock the country’s growth potential. There is an overarching thread which aims to protect the most vulnerable and strengthening of governance mechanisms in the diktats of the IMF. The programme will also ensure close collaboration between Sri Lanka and its creditors most of who including the Paris Club, China, India and Japan have assured the IMF of their fullest support.
Given Sri Lanka’s catastrophic economic crisis which quickly spiraled into a humanitarian one, the challenges faced by the country stemming from pre-existing vulnerabilities, bad policy decisions and financial mismanagement was further exacerbated by external shocks including the aftershocks of the pandemic which cascaded to the softening of the country’s primary export markets. With global inflation hitting record highs, energy crises, the war in Ukraine and retail slumps, Sri Lanka continued to be caught in buffeting winds on stormy seas.
In a statement issued by the IMF, Managing Director Kristalina Georgieva explained that while Sri Lanka had been facing tremendous economic and social challenges including a recession, over 70 percent inflation, depleted reserves, unsustainable public debt and heightened financial sector vulnerabilities exacerbated by bad governance and institutional frameworks, this EFF-supported programme is critical for the country in order to not just overcome the crisis but to make it sustainable. Adding that strong ownership for reforms is critical, she reiterated that ambitious revenue based fiscal consolidation is vital to restore fiscal and debt sustainability while protecting the poor and vulnerable.
Sri Lanka instituted revolutionary taxation reforms and sharp increases in utility prices, both of which were decried by its citizens as being too harsh. However, these were deemed necessary in order to meet the IMF parameters of the EFF. Georgieva however is adamant that these reforms, utility prices and public financial and expenditure management which were also implemented, be maintained to ensure fiscal adjustments are successful.
“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 programme. The authorities’ commitments to transparently achieve a debt resolution, consistent with the programme parameters and equitable burden sharing among creditors in a timely fashion, are welcome,” she stated.
She also advised Sri Lanka to remain committed to the multi-pronged disinflation strategy to safeguard the credibility of its inflation targeting regime. “As the market regains confidence, the authorities’ recent introduction of greater exchange rate flexibility will help to rebuild the reserve buffer,” she said. She urged Sri Lanka to maintain a sound and adequately capitalized banking system, to implement a bank recapitalization plan, strengthen financial supervision and crisis management frameworks, which are all crucial to ensure financial sector stability.
A more comprehensive anti-corruption reform formula including far-reaching anti-corruption legislation, anti-corruption governance framework and growth enhancing structural reforms will be guided by the IMF’s governance diagnostic mission.
Sri Lanka’s growth contracted 8.7 percent in 2022 and is project to a negative growth of 3 percent in 2023. However, projections beyond 2024 are more positive provided the country remains with its progressive yet challenging growth formula which will be the fillip needed for the growth trajectory to take root from next year. However, Sri Lankans, while showing immense resilience in times of abject challenges, has also been known to be short-sighted, seeking short-term fixes which for the most part are politically motivated. Only time will tell if the Pearl of the Indian Ocean will regain its lustre.
