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The International Monetary Fund (IMF) on Thursday approved a loan of $2.9 billion to Sri Lanka, reported Reuters. The island country, which is battling its worst economic crisis since independence in 1948, witnessed widespread protests earlier this year that forced Gotabaya Rajapaksa to resign as President, and brought Ranil Wickremesinghe to power.
On Tuesday, President Wickremesinghe, who is also the country’s Finance Minister, presented his first budget that aimed to boost revenue and fight inflation.
The agreement between Sri Lanka and the IMF is only preliminary, and has to be approved by the IMF management and its executive board. It will also go through only if Sri Lankan authorities carry out previously agreed measures.
“The staff level agreement is only the beginning of a long road for Sri Lanka,” senior IMF official Peter Breuer was quoted as saying by Reuters. “Authorities have already begun the reform process and it must continue with determination.”
On Thursday afternoon, hours after the IMF announcement, Milinda Moragoda, the High Commissioner of Sri Lanka to India, said at the Idea Exchange programme at The Indian Express: “They have worked out the contours of a restructuring programme. We have commercial debt, bilateral and multilateral debt, and domestic debt…so how to balance this… Then there are some upfront measures to take, and then we move into the programme.”
In its statement, the IMF said “the debt relief from Sri Lanka’s creditors and additional financing from multilateral partners will be required to help ensure debt sustainability and close financing gaps”.
The funds will be disbursed over four years to help stabilise the economy and boost growth. According to the Reuters report, the package will help raise government revenue to support fiscal consolidation, introduce new pricing for fuel and electricity, hike social spending, bolster central bank autonomy and rebuild depleted foreign reserves.
“Starting from one of the lowest revenue levels in the world, the programme will implement major tax reforms. These reforms include making personal income tax more progressive and broadening the tax base for corporate income tax and VAT,” the IMF statement said.
At Idea Exchange, High Commissioner Moragoda said: “The key here is the fact that the agreement gives confidence”, even though the quantum of loan is not huge for the situation that Sri Lanka is in. “It gives confidence for investors to come in, it gives confidence for maybe our remittances which have dropped by half to increase, and it also gives confidence for other bilaterals to come in…”
India, the High Commissioner said, had stood by Sri Lanka “right through this year, without having any idea of where this (the crisis) was going… That’s why we are so grateful. India encouraged us to go to the IMF, India was really the only country, the only partner, who stepped up without us having any kind of programme, so now we are hoping that others would come in…”
The IMF said “The programme aims to reach a primary surplus of 2.3 per cent of GDP by 2024.”
Sri Lanka owes more than $51 billion in foreign debt, of which $28 billion has to be repaid by 2028, reported The Associated Press. According to the IMF, the country’s economy will shrink by 8.7 per cent in 2022 while inflation rises to above 60 per cent.
On Tuesday, President Wickremesinghe proposed a budget aimed at increasing government revenue to around 15 per cent of the GDP by 2025, cutting down public sector debt, controlling inflation and increasing value added tax to 15 per cent from the current 12%, Reuters reported. He also revised the country’s deficit projection for 2022 to 9.8 per cent of the gross domestic product from 8.8 per cent earlier.
On the ground, Wickremesinghe said international organisations including the United Nations had launched programmes to ensure food security, while schools and colleges have reopened.
Economists say the crisis stems from domestic factors such as years of mismanagement and corruption.
Conditions have been deteriorating for the past several years. In 2019, Easter suicide bombings at churches and hotels killed more than 260 people. That devastated tourism, a key source of foreign exchange.
High Commissioner Moragoda pointed to historical reasons and long term policy choices that contributed to the crisis that finally came to a head after the coronavirus pandemic and the war in Ukraine.
In the years after independence, he said, Sri Lanka’s tendency, like that of most countries, was to move left, and it started to invest heavily in social programmes. “That has paid dividends; our quality of life and indices are very impressive by any standards,” he said. “But the fact is we did not look after our economy; we spent money, but we did not invest in growth. For a long time, our economy was closed, your (India’s) economy was also closed, but you had your own market…”
The Sri Lankan economy was opened in 1977, but the outlook of society remained “statist”, Moragoda said. “Eighty per cent of our revenues was spent on salaries to public servants… 1.5 million government servants and 500,000 pensioners. Our population is 22 million, so you can imagine the proportion…,” he said.
Sri Lanka borrowed heavily in the international market after the end of the civil war in 2009, and “now, over 70 per cent of our revenue is going to pay the interest on the debt that we have taken”, the High Commissioner said. “So every year, you start by borrowing. This had to crash, there was no question… Then Covid struck, and we had the Ukrainian crisis, and so it went on and just tipped over…”
The High Commissioner recalled the legendary Singaporean statesman Lee Kuan Yew’s cryptic description of Sri Lankan democracy: “Sri Lankan democracy is a periodic auction of non-existent resources,”, LKY said. And that’s what we have been doing, politicians have been outbidding each other,” Moragoda said.
High Commissioner Moragoda flagged the structural issues in the Sri Lankan economy, in sectors such as electricity, petroleum, financial services, and telecom sectors, which will need to be addressed. Some deregulation has already begun, their pace has to be speeded up. There also has to be a major recapitalisation of banks.
“I think we have to look at increasing the amount that reaches the bottom of the pyramid. People are used to a certain standard… so we have to re-target and reposition, all this is going to be extremely painful,” he said. “According to the IMF our economy will contract both this year and the next year, so growth will come only in the following year, on a much reduced base. We are entering a very difficult period.”
