A person waves Sri Lanka’s national flag after climbing a tower near presidential secretariat in Colombo on July 11, 2022, after it was overrun by anti-government protestors. (Photo by ARUN SANKAR/AFP via Getty Images)
Arun Sankar | Afp | Getty Images
The International Monetary Fund has finally approved a $3 billion bailout for Sri Lanka, paving the best way for the country’s crisis-stricken economy to restructure its debt, and for the economy to enhance in 2024.
The South Asian country is grappling with its worst financial crisis in a long time and the IMF’s decision will allow a direct disbursement of a $333 million loan over 4 years.
Sri Lanka has been “hit hard by catastrophic economic and humanitarian crisis,” Krishna Srinivasan, director of the IMF’s Asia and Pacific department, told CNBC.
“This you may trace back to a few aspects: One is pre-existing vulnerabilities, policy missteps, and shocks,” he told CNBC’s Sri Jegarajah in an interview early Tuesday in Asia.
“In response to that, the economy has contracted quite sharply. We expect a contraction around 8% in 2022, a 3% contraction this 12 months before the economy picks up next 12 months.”
In consequence, Sri Lanka’s debt levels have grow to be unsustainable and inflation stays elevated, he added.
“All of the macro fundamentals are pretty sobering.”
The Sri Lankan rupee last strengthened 4.5% against the U.S. dollar on Tuesday.
Restoring stability
Sri Lanka has struggled with severe shortages of food, medicine, fuel and electricity since last 12 months. This has led to offended protests that forced then-President Gotabaya Rajapaksa to flee his country and ultimately resign.
In July, the country’s lawmakers selected six-time Prime Minister Ranil Wickremesinghe as president as his successor.
In response to the most recent IMF bailout, Wickremesinghe thanked the IMF in a tweet and said his country is committed to its “reform agenda,” adding that the IMF program is “critical to achieving this vision.”
The essential aim of the IMF loan is to deal with “macroeconomic stabilization” and restore debt sustainability within the short term, said Srinivasan.
“But going beyond that, this system also goals to mitigate the impact of the crisis on the poor and vulnerable,” he noted. “It goals to safeguard national stability and strengthen governance,” to enhance the country’s growth potential for the long run.
Gabriel Sterne, head of world emerging markets at Oxford Economics, told CNBC in an interview, the IMF’s loan approval is important for Sri Lanka, which defaulted on its debt last 12 months.
“It’s a giant moment, very positive for the country overall as adherence to this system will point a way out of a partly self-induced crisis,” he said. “There are many examples of IMF programs restoring stability, though these often come at the associated fee of painful austerity.”
“In Sri Lanka’s case the previous government won by a landslide on the platform of dreadful economic policies that made crisis inevitable, which led to changes in ruling politicians under the shadow of social protest,” Sterne added.
The economist said “poor governance” and what he called the “lack of incentive to pursue responsible policies” remain a priority going forward.
Analysts have also argued Sri Lanka needs institutional reforms with the intention to achieve long-term debt sustainability.
Critical reforms
“Ambitious revenue-based fiscal consolidation is vital for restoring fiscal and debt sustainability” in Sri Lanka, said Kistalina Georgieva, IMF’s managing director.
“On this regard, the momentum of ongoing progressive tax reforms needs to be maintained, and social safety nets needs to be strengthened and higher targeted to the poor,” she said in a press release.
“For the fiscal adjustments to achieve success, sustained fiscal institutional reforms on tax administration, public financial and expenditure management, and energy pricing are critical.”
She also said the country’s ongoing efforts to tackle corruption should proceed, including revamping anti-corruption laws.
Will bailout work?
This can be the 17th time that Sri Lank has approached the IMF for a bailout.
Wickremesinghe in a recent speech acknowledged “there isn’t any room for failure in completing every task agreed upon with the IMF, unlike the previous 16 occasions.”
“Probably the greatest predictors of who may have a debt crisis in the long run is what number of crises you’ve had previously, and Sri Lanka may struggle to recuperate its repute on international financial markets,” said Oxford’s Sterne.
“Even when the IMF program works out, what can be the discipline on politicians once the IMF leaves?” he added.
Still, this can be a “barely different crisis than what now we have seen previously,” said IMF’s Srinivasan.
“There’s broad recognition of the indisputable fact that debt sustainability must be restored. There’s broad agreement that this may require each fiscal consolidation on the a part of the federal government,” he said, adding that implementation is essential.
“We do see a big amount of ownership and there must be a big amount of leadership, in order that there’s buy-in for this whole program,” noted Srinivasan.
“This can be something where society at large may have to play a vital role, together with all other stakeholders, including the political actors.”
