Are we out of the woods? - EDITORIAL

Exactly a year ago, Sri Lanka was in the midst of an economic cum political crisis with an unprecedented foreign exchange slump having resulted in miles-long, days-long queues for fuel and cooking gas and prices having gone three-fold up, compared to that of the previous year. In the political front, the government of President Gotabaya Rajapaksa was facing an unprecedented massive public uprising while he was helplessly struggling to resolve economic issues. 

However, there are no such queues now, no agitations by farmers in rural areas nor any other group in the streets of urban areas. The government has reached an agreement with the International Monetary Fund (IMF) for a bailout package that includes a nearly US$ 3 billion loan for four years, contingent on a reform programme prescribed by the Washington-based international lender. Does it mean that Sri Lanka is now out of the woods? 
Sri Lanka’s current problem is mainly a foreign exchange issue. Then how did the country manage it? In an interview with the Daily Mirror of April 20, the World Bank Country Director for Sri Lanka, Nepal and the Maldives, Faris Hadad Zervos answers this question. 

He says “In the absence of large debt service payments, the authorities have been able to manage the outflows (mainly the import bill) with inflows such exports, tourism and remittances since the second half of 2022, leading to a balance of payment surpluses.” And he adds, “In addition, the lack of demand for imports from the real sectors and increasing expectations of approval of the IMF programme contributed to a rise in foreign exchange liquidity, including through the unwinding of speculative Dollar holdings.”

Very clear, we are not out of the woods. We are not repaying our debts, nor spending foreign exchange for imports as we did earlier in order to save it for immediate and more essential needs. This is an essential and inevitable step on a recovery path. However, it is not a situation to celebrate. Despite the IMF and the creditor nations having promised to lend a helping hand to come out of the current mess, the way forward is difficult and still in the balance.  

Sri Lanka needed to present a restructuring strategy and it had “committed to do that by the end of April,” IMF officials told a press briefing soon after IMF executive board approved its staff level agreement with Sri Lanka on March 20. However, the country failed to achieve that target and it is now said that the strategy would be presented at the end of this month. 

The debt restructuring strategy is very important as it was the prime reason for the more than six months delay in the IMF Board approval for the staff level agreement which was reached on September 1, last year. IMF officials told media last month that the reform programme prioritizes five key pillars. One of them is “restoration of public debt sustainability including through a debt restructuring to ensure stable financing of the Government’s operations. 

The first tranche of the EFF of US$ 330 million was transferred to Sri Lanka immediately after the Board approval of the agreement. However, the next “disbursements will be tied to reviews that take place every six months.” For a government with an unsustainable debt burden to be dropped halfway by the IMF is disastrous. So, the fulfilling of commitments is very vital.

The IMF did not press the country for restructuring local debts. The officials said during the above press briefing “whether local is included in there or not, is for the (Sri Lankan) authorities to set up.” Yet, President Ranil Wickremesinghe told Parliament during the debate on the IMF programme on April 26, that the foreign creditors have informed the government to discuss domestic restructuring as well. He also said that some local banks have said they cannot face this situation. The IMF officials too, after leaving the matter to the government said, “What we worry about, of course, is whether there are any implications with respect to the economy or to financial stability.”  It means it is a risky step. However, the government seems to be firm on restructuring local debt.

The IMF has set some targets to the country to achieve as a way out of the crisis. Accordingly, debt stock of Sri Lanka which was at 128% of GDP as of end-2022 should reach 95% of GDP by 2032. Gross financing needs which were more than 34% of GDP in 2022 has to be below 13% of GDP between 2027 and 2032 on average. Government’s annual debt service in foreign currency which was more than 9% of GDP in 2022 must come down to below 4.5% of GDP in every year between 2027 and 2032. 

The country has to gradually normalize its balance of payment to rebuild its international reserves. In this process, the IMF officials said the Central Bank has to purchase foreign exchange amounting US$1.4 billion in 2023. Only the achievement of these targets would take the country on a path of growth. This part is purely a responsibility of the government. IMF would provide only a breathing space for it. Whether the government has such a development plan, is not clear.