Sri Lanka: IMF approves $3 bn bailout to support India’s cash-strapped neighbor
Virendra Pandit
New Delhi: After a year of unprecedented political and economic turmoil which resulted in the overthrow of the Rajapakse dynasty’s stranglehold on bankrupt Sri Lanka, the International Monetary Fund (IMF) approved a nearly USD 3 billion bailout package on Monday for the South Asian island nation.
Sri Lanka is burdened with an external debt of around USD 43 billion. In its hour of crisis in 2022, India extended a lifeline worth nearly USD 4 billion to its next-door neighbor.
The global lender said its executive board approved the bailout program for Colombo over the next four years to help salvage the country’s bankrupt economy, adding nearly USD 333 million will be disbursed immediately. This approval will also open up financial support from other institutions.
“Sri Lanka has been facing tremendous economic and social challenges with a severe recession amid high inflation, depleted reserves, an unsustainable public debt, and heightened financial sector vulnerabilities,” IMF Managing Director Kristalina Georgieva was quoted as saying, the media reported on Tuesday.
“Institutions and governance frameworks require deep reforms. For Sri Lanka to overcome the crisis, swift and timely implementation of the EFF-supported program with strong ownership for the reforms is critical.”
This approval will unlock financing of up to USD 7 billion from the IMF and other international multilateral financial institutions, President Ranil Wickremesinghe’s office said.
Earlier this month, the last hurdle for the approval was cleared when China joined Sri Lanka’s other creditors in providing debt restructuring assurances.
“From the very start, we committed to full transparency in all our discussions with financial institutions and with our creditors,” Wickremesinghe said in a statement from his office. “I express my gratitude to the IMF and our international partners for their support as we look to get the economy back on track for the long term through prudent fiscal management and our ambitious reform agenda.”
Wickremesinghe said he has made some tough decisions to ensure stability and debt sustainability and to grow an inclusive and internationally attractive economy.
Colombo increased income taxes sharply and removed electricity and fuel subsidies, fulfilling prerequisites of the IMF program. Authorities must now discuss how to restructure its debt with Sri Lanka’s creditors.
“Having obtained specific and credible financing assurances from major official bilateral creditors, it is now important for the authorities and creditors to make swift progress towards restoring debt sustainability consistent with the IMF-supported program,” Georgieva said.
“The authorities’ commitments to transparently achieve a debt resolution, consistent with the program parameters and equitable burden sharing among creditors in a timely fashion, are welcome,” she said.
In April 2022, Sri Lanka suspended repayment of its foreign debt amid a severe foreign currency crisis, because of a fall in tourism and export revenue due to the Covid-19 pandemic, megaprojects funded by Chinese loans that did not generate income, and releasing foreign currency reserves to hold the exchange rates for a longer period.
The currency crisis created severe shortages of some foods, fuel, medicine, and cooking gas, leading to angry street protests that forced then-President Gotabaya Rajapaksa to flee the country and resign. His brother, Prime Minister Mahinda Rajapaksa also fled the country, and so did many of their accomplices. After failing to get political asylum anywhere, a discredited Gotabaya returned home a few weeks ago.
Since Wickremesinghe took over, he managed to reduce shortages and ended hours-long daily power cuts. The Central Bank of Sri Lanka said its reserves have improved and the black market no longer controls the foreign currency trade.
However, Wickremesinghe’s government is likely to face hostility from trade unions over his plans to privatize state ventures as part of his reform agenda and public resentment may increase if he fails to take action against the Rajapaksa family, who people believe were responsible for the severest economic crisis since the country gained Independence from the British in 1948.
Wickremesinghe’s critics accuse him of shielding the highly unpopular Rajapaksa family, who still control a majority of lawmakers in Parliament, in return for their support for his presidency.
The next presidential elections in Sri Lanka are due in September 2024.
