The International Monetary Fund (IMF) has given its initial approval for a 2.9 billion USD four-year bailout package for Sri Lanka. This highly-anticipated move is designed to help the south Asian nation, currently facing a severe economic crisis, regain stability and ensure it can sustainably manage its debt.
Understanding the Bailout Package
Sri Lanka’s economy tumbled into a deep crisis following a series of unfortunate events, accumulating a debt of 51 billion USD. First, the country was shaken by the Easter bombings in Colombo in April 2019. Then came the government’s policy of lowering taxes and offering substantial subsidies to farmers during their campaign. Finally, the Covid-19 pandemic in 2020 had a detrimental impact on exports of tea, rubber, spices, garments, along with the tourism sector.
The IMF bailout, to be disbursed over four years, is less than the financial help offered by India to Sri Lanka within a span of just four months. However, before the package can be provided, it must receive approval from the IMF’s board of directors and Sri Lanka’s international creditors. Broadly speaking, these creditors include commercial lenders like banks, asset management companies, as well as bilateral creditors from nations like China, Japan, and India.
This bailout package carries multiple benefits for Sri Lanka. It could enhance the country’s credit rating, thus boosting confidence among international creditors and investors who might then contribute bridge financing to close gaps between tranches. The program is also designed to boost government revenue, promote fiscal consolidation, introduce new pricing for fuel and electricity, increase social spending, strengthen central bank autonomy, and rebuild depleted foreign reserves. The ultimate goal of the program is to achieve a primary surplus of 2.3% of GDP by 2024.
What Steps is Sri Lanka Taking to Revive its Economy?
To fight back against its economic downturn, Sri Lanka has a few recovery strategies in motion. These include increasing revenue to 15% of GDP by 2025 from the 8.2% recorded at the end of 2021. The country plans to achieve this by reducing public debt and implementing measures such as increasing VAT from 12% to 15% and making tax registration compulsory for everyone aged 18 years and above. The government also proposes to privatise about 50 state-owned enterprises.
Further, Sri Lanka is realigning its workforce by reducing the retirement age in government and semi-government organizations from 65 and 62 respectively to 60. To address recapitalization requirements due to non-repayment of loans, a proposal has been made to offer a 20% shareholding in state banks to staff and depositors.
About the International Monetary Fund (IMF)
The IMF is an international body that strives to foster global economic growth, financial stability encourages international trade, and seek poverty reduction. When a nation borrows from the IMF, it must agree to adjust its economic policies to resolve the issues that led it to seek financial aid. Policy adjustments, or ‘conditions’, are a vital part of IMF loans and help ensure the borrowing nation can repay the IMF.
IMF Loan Conditions
Different policy commitments are agreed upon with authorities of borrowing countries. These include prior actions, quantitative performance criteria (QPCs), indicative targets (ITs), and structural benchmarks (SBs). Prior actions ensure a program has a solid foundation before IMF approves financing. QPCs pertain to macroeconomic variables controlled by the authorities and are always specific, measurable loan conditions. ITs might be set for quantitative indicators to track progress in meeting a program’s objectives. SBs are non-quantifiable reform measures critical for achieving program goals and serve as markers to evaluate program implementation.
IMF’s SDR Basket of Currencies
The IMF established an international reserve asset called Special Drawing Rights (SDR) in 1969, aimed at supplementing member countries’ official reserves. The SDR’s value is derived from a basket of five currencies – the US Dollar, Euro, Chinese Renminbi, Japanese Yen, and British pound sterling. The Chinese Renminbi was added to the basket on October 1, 2016.
Bretton Woods Institutions: The World Bank and the IMF
Collectively referred to as the Bretton Woods Institutions, The World Bank and the IMF are two inter-governmental pillars supporting the structure of the world’s economic and financial order. Although they share numerous common characteristics, their roles, functions, and mandates are distinctly different.
