IMF bailout prospects become bleak
Sri Lanka’s prospects of receiving an International Monetary Fund (IMF) bailout package to avert the economic crisis have become bleak with the intensifying of people’s protests against mishandling the economy and an unprecedented fuel price hike.
IMF and Sri Lanka have not reached understanding, on how to fulfil the key requirements for what could be a Rapid Financing Instrument (RFI) which would include policies to continue ensuring debt sustainability to address the balance of payment challenges including from the COVID-19 impact on the economy and to preserve international reserves. A delegation led by Finance Minister Ali Sabry this week held discussions in the US with IMF and World Bank officials.
The US$1.5 billion EFF arrangement approved in 2016 expired on June 2, 2020. Given that the final review under the arrangement was not completed, Sri Lanka could not avail of the last disbursement under the EFF, amounting to SDR118.550 million (about $200 million).
Disbursements under any Fund arrangement can only be made during the period between the date of its approval by the IMF Board and its expiry date,
IMF Sri Lanka mission chief Masahiro Nozaki said adding that no agreement has been reached regarding IMF assistance as the talks are ongoing.
The government’s credibility and its stability are at stake following the killing of a protester and injuring 24 others in street protest in Rambukkana during the country’s talks with the IMF in Washington, economists said.
The government has purposely delayed the seeking of IMF assistance during the past two years and it has not made a formal request for an Extended Fund Facility or RFI for reasons better known to the Central Bank and Finance Ministry heads. Dr. Aminda Methsila Perera a Senior Lecturer of Wayamba University pointed out.
The specific design of Sri Lanka’s IMF-supported programme, including the programme targets and conditionality, would be agreed through extensive discussions between the authorities and IMF staff, and guided by the applicable IMF policies. The discussions are still at an early stage, he pointed out. Others said the last chance of getting donor agency support is now diminishing owing to the mishandling of public unrest triggering a humanitarian crisis as IMF’s assistance is linked debt sustainability which results in social unrest. Sri Lanka is hoping for $4 billion from the IMF.
The economic downturn, dwindling foreign reserves and high inflation, political instability and countrywide public unrest have pushed Sri Lanka team headed by Finance Minister Ali Sabri who sought US$ 4 billion assistance into a very weak bargaining position in their current negotiations, other economists said.
Former chairperson of Human Rights Commission Professor Deepika Udagama said that it is essential to build respect for and trust in the human rights protection to gain the attention of the international donor agencies specially the IMF when seeking foreign assistance.
In an email sent to the Business Times, Mr Nozaki noted that they are very concerned about the current economic crisis in Sri Lanka and hardships suffered by the people, especially the poor and vulnerable.
An IMF-supported programme should be designed to resolve Sri Lanka’s acute balance of payments problems and put the economy back on a sustainable growth path as early as possible.
The 2021 Article IV staff report published in March 2022 said that, in IMF staff’s view, Sri Lanka’s public debt is unsustainable. When the IMF determines that a country’s debt is not sustainable, the country needs to take steps to restore debt sustainability prior to IMF lending. Thus, approval of an IMF-supported program for Sri Lanka would require adequate assurances that debt sustainability will be restored.
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