A person waves the national flag of Sri Lanka after climbing a tower near the president’s office in Colombo on July 11, 2022, after the tower was overrun by anti-government protesters. (Photo by ARUN SANKAR/AFP via Getty Images)
Arun Sankar | AFP | Getty Images
The International Monetary Fund finally approved the so-called $3 billion in aid to Sri Lankapaving the best way for the country to restructure its debt and improve its economy in 2024.
The South Asian country is facing its worst financial crisis in many years and the IMF’s decision will allow the immediate disbursement of a $333 million loan over 4 years.
Sri Lanka has been “hit hard by a catastrophic economic and humanitarian crisis,” Krishna Srinivasan, director of the IMF’s Asia-Pacific department, told CNBC.
“This may be traced back to a few aspects: one is pre-existing vulnerabilities, policy mistakes and upheavals,” CNBC’s Sri Jegarajah said in an interview in Asia on Tuesday.
“The economy contracted quite sharply in response to that. We expect a decline of around 8% in 2022, a 3% decline this yr before the economy recovers next yr.”
Consequently, Sri Lanka’s debt level has turn into unsustainable and inflation stays elevated, he added.
“All of the macroeconomic fundamentals are quite sobering.”
The Sri Lankan rupee was last up 4.5% against the US dollar on Tuesday.
Restoring stability
Sri Lanka has been facing severe shortages of food, medicine, fuel and electricity since last yr. This led to offended protests that forced then-President Gotabaya Rajapaksa to flee the country and eventually resign.
In July, national lawmakers elected six-time prime minister Ranil Wickremesinghe as president as his successor.
In response to the IMF’s recent aid, Wickremesinghe thanked the IMF in a tweet and said his country was committed to a “reform agenda”, adding that the IMF’s agenda was “critical to achieving that vision.”
The important purpose of the IMF loan is to deal with “macroeconomic stabilization” and restore debt service in the short term, Srinivasan said.
“But going beyond that, this system also goals to mitigate the impact of the crisis on the poor and vulnerable,” he noted. “Goals to guard national stability and strengthen governance” to enhance the country’s growth potential in the long run.
Gabriel Sterne, head of world emerging markets at Oxford Economics, told CNBC that the IMF’s approval of the loan is critical for Sri Lanka, which defaulted on its debt last yr.
“It is a big moment, very positive for the entire country, because adhering to this system will show the best way out of a partially self-generated crisis,” he said. “There are a lot of examples of IMF programs bringing stability back, though often at the price of painful austerity.”
“Within the case of Sri Lanka, the previous government won by a landslide on a platform of disastrous economic policies that made the crisis inevitable, resulting in changes in ruling politicians overshadowed by popular protests,” Sterne added.
The economist said “weak governance” and what he called “lack of incentives for responsible policies” would remain an issue going forward.
Analysts have also argued that Sri Lanka needs institutional reform to attain long-term debt sustainability.
Critical reforms
“Ambitious revenue-based fiscal consolidation is crucial to revive fiscal and debt sustainability” in Sri Lanka, said Kistalina Georgieva, managing director of the IMF.
“Subsequently, the momentum of ongoing progressive tax reforms ought to be maintained and social safety nets ought to be strengthened and higher targeted on the poor,” she said in an announcement.
“For fiscal adjustment to achieve success, sustainable fiscal reforms in tax administration, public finance and spending management and energy pricing are key.”
She also said that the country’s ongoing efforts to fight corruption should proceed, including changes to anti-corruption laws.
Will the surcharge work?
It will be 17p when Sri Lanka turned to the IMF for help.
Wickremesinghe wa a recent speech acknowledged that “there isn’t a room for failure in every task agreed with the IMF, unlike the previous 16 cases.”
“Probably the greatest predictors of who will have a debt crisis in the longer term is the variety of crises in the past, and Sri Lanka may struggle to regain its fame in international financial markets,” said Sterne of Oxford.
“Even when the IMF program succeeds, what will be the discipline for politicians after the IMF leaves?” he added.
Still, that is “a rather different crisis from what we have seen in the past,” Srinivasan of the IMF said.
“There may be broad recognition that debt sustainability must be restored. There may be general agreement that this will require each fiscal consolidation by the federal government,” he said, adding that implementation was crucial.
“We see a major amount of ownership and there must be a major amount of leadership for this whole agenda to have support,” Srinivasan noted.
“It will be something where society as an entire will need to play a very important role together with all other stakeholders, including political actors.”