Sri Lanka’s reluctance to tap the IMF helped push it into the abyss

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 chronic power outages and shortages of essentials, including fuel and medicine.

President Gotabaya Rajapaksa’s government is under increasing pressure to manage the economy and the country has suspended foreign debt repayments in an effort to preserve its meager foreign exchange reserves.

On Monday, Sri Lanka will begin talks with the International Monetary Fund (IMF) for a loan program, even seeking help from other countries, including neighboring India and China.

How did it get there?
Economic mismanagement by successive governments weakens Sri Lanka’s public economy, causing its national expenditure to exceed its income and the production of commercial goods and services to fall short.

Shortly after taking power in 2019, the situation was exacerbated by the deep tax cuts enacted by the Rajapaksa government, which came just months before the coronavirus disease 2019 (COVID-19) crisis.

The epidemic has wiped out parts of its economy – mainly the lucrative tourism industry – while an inflexible foreign exchange rate has reduced remittances from its foreign workers.

Rating agencies, concerned about the inability to repay government funds and large foreign loans, have downgraded Sri Lanka’s credit rating since 2020, eventually locking the country out of international financial markets.

But to keep its economy afloat, the government is still leaning heavily on its foreign exchange reserves, reducing them by more than 70% in two years.

As of March, Sri Lanka’s reserves were only $ 1.93 billion, insufficient even for one month’s imports, and there was a shortage of everything from diesel to some foodstuffs.

JPMorgan analysts estimate that the country’s total debt services will amount to $ 7 billion this year, with the current account deficit coming to about $ 3 billion.

What did the government do?
Faced with a rapidly deteriorating economic environment, the Rajapaksa government chose to move quickly and wait rather than seek help from the IMF and other sources.

For months, opposition leaders and experts have called on the government to take action, but in the hope that tourism will return and remittances recover, it will hold its ground.

Newly-appointed Finance Minister Ali Sabri told Reuters in an interview earlier this month that the government and Sri Lanka’s central bank chief did not understand the gravity of the problem and were reluctant to approach the IMF. The new central bank governor was brought in as part of a new team to deal with the situation.

However, aware of the drinking crisis, the government sought help from countries including India and China. Last December, the then finance minister traveled to New Delhi from India to arrange a $ 1.9 billion credit line and exchange.

A month later, President Rajapaksa asked China to restructure the outstanding debt of about $ 3.5 billion owed to Beijing, which paid Sri Lanka $ 1.5 billion yuan in exchange by the end of 2021.

What happens next?
Finance Minister Sabri will begin negotiations with the IMF for a loan package of up to $ 3 billion in three years.

An IMF program, which typically requires financial discipline from borrowers, is also expected to help Sri Lanka receive another 1 1 billion in assistance from other multilateral institutions, such as the World Bank and the Asian Development Bank.

In all, the country needs about $ 3 billion in bridge funding over the next six months to help restore the supply of essentials, including fuel and medicine.

India is open to giving another ড 2 billion to Sri Lanka to reduce the country’s dependence on China, sources told Reuters.

Sri Lanka has asked India for an additional $ 500 million credit line for fuel.

With China, the government is negotiating for $ 1.5 billion in credit lines and up to $ 1 billion in syndicated debt. In addition to the swaps last year, Beijing also increased the 1.3 billion syndicate debt in Sri Lanka at the start of the epidemic. – Reuters