Will IMF save Sri Lanka?

The staff level agreement between Sri Lanka and the International Monetary Fund (IMF) which was arrived at on September 1 last year, was to be approved by the IMF Executive Board yesterday and the government has expressed confidence that Sri Lanka will receive the first tranche of the Extended Fund Facility (EFF) under the agreement which is a 48-month arrangement. 

The country which declared bankruptcy due to its inability to repay the foreign loans in April last year is totally depending now on the bailout package of the IMF for the economic recovery. In spite of the recent appreciation of rupee for a brief period in early March, the country is still facing a severe shortage of foreign exchange to repay its foreign loans which run into around US$50 billion and to import essential items such as fuel and life-saving drugs and ingredients for local industries. 

Hence, the leaders of the government hope to regain the confidence of the creditor countries and the international finance institutions after the approval of the EFF which is about US$ 2.9 billion for four years, by the IMF Executive Board. This would pave the way for the country to get more financial assistance from those countries and institutions in order to ensure the day-to-day activities of the government and to kick start the economy which has been contracted largely. 

At a time when a country has declared bankruptcy, the government of that country has no option but to go to the IMF and with the global lender’s assistance obtain more loans to implement an economic recovery plan, if any. That is what is happening now and there is no point of opposing it

President Ranil Wickremesinghe has told Parliament on March 7 that the country will get the first round of money from the World Bank and the Asian Development Bank soon after the IMF approves its EFF. Newspaper reports indicated that the government was expecting around US$3 billion from those two banks and Japan. At a time when a country has declared bankruptcy, the government of that country has no option but to go to the IMF and with the global lender’s assistance obtain more loans to implement an economic recovery plan, if any. That is what happening now and no point of opposing it.

The current IMF programme with regard to Sri Lanka is started by President Gotabaya Rajapaksa’s government exactly one year ago; in mid-March last year, reversing its earlier resistance to the intervention of the Washington based lender, as efforts to bolster its foreign exchange reserves and manage looming debt payments had been complicated. And in May, last year, the government hired international financial and legal advisers Lazard and Clifford Chance, on the recommendation by a committee headed by Treasury Secretary Mahinda Siriwardena and Central Bank Governor Nandalal Weerasinghe, to facilitate its expected debt structuring programme. 

This part of the process would not have changed even if President Gotabaya Rajapaksa had continued to remain in office nor would it have deviated its path, had the SJB or the NPP taken over the government in the meantime. The IMF’s formula of remedy for this kind of maladies faced by any country would be the same, irrespective of the political party in office. It would press the governments to curtail state expenditure and extract funds from within the country by way of tax or price hikes to stabilize the government’s financial standing, despite the heavy economic pressure exerted on the masses by those conditions. 

The indebted governments have only a minute say in the process and it is justified by the fact that those governments have either ruined the economy or failed to resuscitate it, before seeking assistance from the IMF. 
It is due to this formula that the Sri Lankan leftist parties have been opposition the IMF intervention since 1960s. Yet, this time the JVP also seems to have left with no option, except for proposing alternative taxes instead of taxes on income in the current IMF prescription.

However, two factors are still worrying. One is the government is yet to present a road map for the economic recovery, including a stable plan to strengthen the balance of payments while the other being the Sri Lanka’s endemic culture of corruption. Citing the absence of a road map for economic development the SJB described the last budget as a concept paper. On the other hand, The IMF has urged Sri Lanka to reduce corruption vulnerabilities through improving fiscal transparency and public financial management. 

Hence, the government expects to present an anti-corruption Bill in Parliament soon. However, only time will tell the viability of such laws in a country where there are ways to bypass laws.