Explainer-Sri Lanka’s reluctance to tap into IMF helped push it into economic abyss By Reuters

© . FILE PHOTO: Protesters put a sticker on a passing car during a protest against Sri Lankan President Gotabaya Rajapaksa, near the presidential secretariat, amid the country’s economic crisis, in Colombo, Sri Lanka, April 16, 2022. REUTERS/Navesh Chitr By Devjyot Ghoshal and Uditha Jayasinghe COLOMBO () – Sri Lanka’s worst economic crisis has sparked an unprecedented wave of spontaneous protests as the island nation of 22 million people struggles with prolonged power cuts and a shortage of essentials, including fuel and medicines. The government of President Gotabaya Rajapaksa has come under increasing pressure for mishandling the economy, and the country has suspended payment of external debts in a bid to preserve its meager foreign exchange reserves. Sri Lanka will begin talks with the International Monetary Fund (IMF) on Monday for a loan program, even as it seeks help from other countries, including neighboring India and China. HOW DID IT GET TO THIS? Economic mismanagement by successive governments weakened Sri Lanka’s public finances, causing national expenditures to exceed revenues and deficient production of tradable goods and services. The situation was exacerbated by significant tax cuts introduced by the Rajapaksa government shortly after it took office in 2019, just months before the COVID-19 crisis. The pandemic has wiped out parts of its economy – mainly the lucrative tourism industry – while an inflexible exchange rate undermined the remittances of its foreign workers. Rating agencies, concerned about public finances and the inability to repay large foreign debts, downgraded Sri Lanka’s credit rating from 2020, eventually shutting the country off from international financial markets. But to keep its economy afloat, the government still relied heavily on its foreign exchange reserves, which it eroded by more than 70% in two years. In March, Sri Lanka’s reserves stood at just $1.93 billion, insufficient to cover even a month of imports, and led to a rapidly growing shortage of everything from diesel to some food products. Analysts at JP Morgan estimate the country’s gross debt service would hit $7 billion this year, with a current account deficit of about $3 billion. For a related image on Sri Lanka’s dwindling forex reserves, click https://tmsnrt.rs/3tho32L WHAT DID THE GOVT DO? Faced with a rapidly deteriorating economic environment, the Rajapaksa government chose to wait rather than act quickly and seek help from the IMF and other sources. For months, opposition leaders and pundits urged the government to take action, but it held out in hopes that tourism would recover and remittances would recover. Newly appointed Finance Minister Ali Sabry told in an interview earlier this month that key officials within Sri Lanka’s government and central bank did not understand the gravity of the problem and were reluctant to let the IMF intervene. Sabry, along with a new central bank bank governor, was brought in as part of a new team to address the situation. But aware of the brewing crisis, the government did seek help from India and China, among others. Last December, the then finance minister traveled to New Delhi to arrange $1.9 billion in credit lines and swaps from India. A month later, President Rajapaksa asked China to restructure repayments of about $3.5 billion in debt owed to Beijing, which also gave Sri Lanka a $1.5 billion swap in yuan at the end of 2021. For a related image on Sri Lanka’s external debt, click https://tmsnrt.rs/33M3AIQ WHAT HAPPENS NEXT? Finance Minister Sabry is in talks with the IMF for a loan package of up to $3 billion over three years. An IMF program, which typically imposes fiscal discipline on borrowers, is also expected to help Sri Lanka get an additional $1 billion in aid from other multilateral agencies such as the World Bank and the Asian Development Bank. In total, the country will need about $3 billion in bridge financing over the next six months to help restore supplies of essential items, including fuel and medicines. India is open to providing another $2 billion to Sri Lanka to reduce the country’s reliance on China, sources have told . Sri Lanka has also requested an additional $500 million credit line from India for fuel. The government is also in talks with China about a $1.5 billion credit line and a syndicated loan of up to $1 billion. In addition to the swap last year, Beijing also provided a $1.3 billion syndicated loan to Sri Lanka at the start of the pandemic.

Leave a comment