Sri Lanka's debt woes deepen as it joins IMF surcharge list

• Subjected to surcharges following the disbursement of two tranches amounting to US$ 670 million
• Liable to pay US$ 1.06 million in GRA Level Based Surcharges from this February

By Nishel Fernando

Sri Lanka has been added to the list of 22 heavily indebted countries facing controversial surcharges imposed by the International Monetary Fund (IMF) from recently. These additional payments, aimed at countries whose outstanding credit to the IMF’s main account exceeds 187.5 percent of their quota, have stirred debate and concern.

A recent report by the United States-based think tank, Center for Economic and Policy Research (CEPR) highlighted that Sri Lanka is among the latest additions to this list, joining countries such as Benin, Côte d’Ivoire, Kenya, Moldova, North Macedonia, and Senegal. Sri Lanka’s inclusion underscores the financial challenges faced by these nations.

Accordingly, the island nation is subjected to surcharges following the disbursement of two tranches amounting to US$ 670 million out of the US$ 3 billion Extended Fund Facility (EFF) approved by the IMF. The facility is 395 percent of Sri Lanka’s SDR quota with the IMF.

As per the Fund’s recently unveiled Query Tool, Sri Lanka is liable to pay US$ 1.06 million (SDRE 803,360) in GRA Level Based Surcharges from this February to the end of this year alone for funds disbursed so far.

The IMF’s surcharges come in two forms: level-based and time-based. Level-based surcharges are imposed when a country’s outstanding credit exceeds the specified threshold, while time-based surcharges are levied on debt outstanding for three or more years. These measures vary depending on the lending facility, reflecting IMF’s efforts to manage and mitigate risks associated with high debt levels. 

IMF’s Surcharge policy which has been in effect since 1997 has been under heavy criticism from global leaders - economists to civil organisations. Given its pro cyclical nature, CEPR elaborated that  surcharges effectively punish countries facing severe liquidity constraints, increase the risk of debt distress, and divert scarce resources that could otherwise be used to fund health care, climate action, or other social and development needs.

While surcharges were aimed at disincentivising overreliance and supporting maintaining its precautionary balances, CEPR pointed out that both arguments do not hold any validity as shown by IMF’s data.

“..the net increase of six surcharge-paying countries in less than a year, and the significant growth in total surcharge payments, indicate that this burden is only growing. These payments are unnecessary for the IMF to maintain its precautionary balances well above target levels,” it added.