Sitharaman asks IMF, WB to give Sri Lanka low-income tag

(New Delhi) BusinessStandard: Sri Lanka could be given temporary classification as a lower-income country — from the current middle-income status — to help it restructure its debt. And, it should also be given emergency funding similar to the one granted to Ukraine.

These were the recommendations made by Finance Minister Nirmala Sitharaman to the International Monetary Fund (IMF) and World Bank last week, according to sources. This comes as India’s southern neighbour deals with its worst-ever economic crisis.

Sitharaman had actively engaged with various representatives of the multilateral institutions, including World Bank President David Malpass and IMF Managing Director Kristalina Georgieva in support of Sri Lanka. This was done in order to alleviate the country’s ongoing financial predicament and help it better navigate the maze of international financing rules and criteria, sources aware of the discussions said. 

“The minister’s interventions have been on several fronts, including the classification of Sri Lanka as a low-income country and the treatment of Sri Lanka on par with other countries facing dire emergencies, such as Ukraine. She also made use of her position on the board of governors of the IMF to put forward Sri Lanka’s case,” said an official.

According to sources, one of the key interventions made by Sitharaman was to argue that, although Sri Lanka was classified as a middle-income country at the start of the pandemic, the nature of its economy, its dependence on income from the tourism sector and the resultant dip in national revenues due to the pandemic, has meant that the country might possibly be categorised as a lower-income country and should be treated accordingly.
“Classification as a lower-income country would ease the process of restructuring Sri Lanka’s debt,” said one of the sources.

The official clarified that the process of reclassification by the IMF and World Bank is a time-consuming one and hence, this could be done on a temporary basis to help Lanka come out of its current crisis.

The reclassification into a lower-income country will help Sri Lanka restructure its debt under the ‘Common Framework for debt treatment beyond DSSI’. DSSI is Debt Service Suspension Initiative that was set up by the IMF and World Bank after the pandemic and expired in December 2021.

In November 2021, the IMF and World Bank had set up the common framework. The countries eligible for these initiatives are low-income nations with unsustainable debt.

Sitharaman is said to have argued that due to Sri Lanka’s dependence on the tourism sector, the shock to the country’s economy was largely exogenous in nature and caused by the pandemic.

On March 9, 2022, the IMF executive board greenlit US $ 1.4 billion in additional financing for Ukraine under an emergency support programme known as the Rapid Financing Instrument (RFI). Sitharaman is believed to have argued that Sri Lanka could be given assistance under this provision as well.

RFI opens up quick access to financial assistance to countries that urgently need to eliminate mismatches in their balance of payments, particularly those arising due to war and is designed for cases where it is impossible to launch a full-fledged programme of economic reforms.

Sources said that the IMF and World Bank brass have assured the finance minister that her proposals for Sri Lanka are being examined in detail.

So far, aid from India has been in the form of a line of credit worth US $ 1 billion to help Lanka procure food, medicines and essential items. There was another LoC worth US $ 500 million to help it purchase petroleum products. Also, Indian state-owned oil companies released large quantities of diesel to help Sri Lanka fight its ongoing power shortage.