IMF bailout package for Sri Lanka: Pros, cons and risks involved

The IMF bailout package, while expected to improve the foreign reserve of the country and reduce the skyrocketing inflation the country is witnessing now; is not the ultimate solution to address Sri Lanka’s ongoing economic problems.

IMF bailout package for sri lanka
A man walks past the International Monetary Fund (IMF) logo at its headquarters in Washington, US. (Photo source: Reuters)

By Dr Gulbin Sultana

The International Monetary Fund (IMF) Board approved a 48-month extended arrangement under the Extended Fund Facility (EFF) of about US$3 billion to support Sri Lanka’s economic policies and reforms on 20 March 2023. Consequently, Sri Lanka received the first tranche of US$ 330 million of the EFF on 22 March 2023. The IMF bailout package, while expected to improve the foreign reserve of the country and reduce the skyrocketing inflation the country is witnessing now; is not the ultimate solution to address Sri Lanka’s ongoing economic problems. IMF itself has clearly outlined in its report released on 20 March 2023 that “risks to the IMF program implementation are exceptionally high” and therefore, the government must be prepared with a contingency plan.

There are mixed reactions in Sri Lanka about the IMF bailout package. While on the one hand, there is euphoria on the belief that Sri Lanka is no longer a bankrupt country following receipt of the IMF aid package, there is a section in Sri Lanka who are foreseeing worse days ahead in Sri Lanka economically as it is believed that the implementation of the IMF conditions would have a severe impact on the common people. The commentary, therefore, focuses on three broad questions: How does the IMF bailout package help the Sri Lankan government deal with the economic crisis? Why is a section in Sri Lanka opposing the IMF loan? What are the risks associated with the IMF Programme implementation? 

How does the IMF bailout package help the Sri Lankan government deal with the economic crisis?

The IMF bailout package will give Sri Lanka breathing space and enable the country to gain investors’ confidence as well as catalyse financial support from other development partners. The program is expected to infuse budget support from the World Bank and ADB in the amount of US$3.75 billion in addition to the committed loans from the IMF. These resources, together with external public debt service relief (as committed by the creditors), are expected to narrow the external financing gap and allow Sri Lanka to rebuild its gross international reserves to about 100 percent of the Assessing Reserve Adequacy (ARA) metric by end-2027. It is believed that the IMF facility will encourage Japan to resume the suspended projects and thereby will contribute to the growth of the country. Appreciation of the Rupee against the dollar following the IMF package is expected to increase the import of some of the essential items which are crucial to enhance export.

Given the existing economic situation, Sri Lanka has no other option but to depend on loans as a short-term policy to come out of the current crisis. In such circumstances, IMF loans are much cheaper for Sri Lankas it grants low-cost, larger, and long-term loans.

One positive aspect of the current EFF facility is that the IMF for the first time has allowed the funds to be transferred to theTreasury to be used for the requirement of the country instead of the Central Banks Dollar account. If the fund is utilised prudently, the government can provide relief to the poor and underprivileged that are bearing the maximum burden during this economic crisis in Sri Lanka.

Why is a section in Sri Lanka opposing the IMF loan?

A section in Sri Lankais not at all optimistic about the future of Sri Lanka under the IMF programme. IMF has been criticised on several grounds including the non-transparent and interventionist approach in domestic affairs, promoting privatisation and liberalisation, for designing a “one size fits all” programme without considering the recipient country’s unique economic, social, and cultural conditions. The IMF has also been accused of focusing on short-term solutions.

Sri Lanka has availed the IMF loans 16 times in the past during 1965-2016. Out of 16 times, the programme was fully implemented on nine occasions. According to a study conducted by Professor Prema-Chandra Athukorala and published in Daily FT, the growth rate of the economy was significantly higher during the years of fully-implemented IMF programs. However, the impact of the growth achieved during the IMF programme years did not percolate beyond the programme years.

In other words, IMF programmes in the past have failed to provide sustainable solutions to economic recovery in the long run. Had IMF programmes been the panacea of the economic crisis, Sri Lankan economy should not have been in its current situation. It is argued that despite availing the IMF assistance 16 times,the long-standing basic macroeconomic imbalances of the country have continued.

The opponents of the IMF bailout package are, however, more critical of the Ranil Wickremesinghe Government than the IMF itself on the premise that while the IMF is not accountable to the Sri Lankan people, the government of Sri Lanka is. According to the opponents, an accountable government simply cannot accept the IMF conditions which will put more economic burden on the common people of the country. The question to ponder however is whether there was any scope left for the Sri Lankan government to negotiate favourable terms and conditions when they approached IMF as a bankrupt nation last year. 

What are the risks associated with the IMF programme implementation? 

According to the IMF Report, given the “complex debt restructuring process, unfavourable external environment, elevated risks of persistently high inflation, and challenging political and social situation, the programme implementation faces a high risk”.

During 1965-2019, the IMF programme was partially implemented on seven occasions. IMF releases the committed fund in tranches depending on the recipient country’s ability to fulfil the conditions. Sri Lanka’strack record of reform implementation during the previous IMF programme is weak. Full disbursement of the current EFF will depend on the Sri Lankan government’s ability and willingness to adhere to the IMF conditions during the next four years.

The IMF reached a staff-level agreement with Sri Lanka on a $ 2.9 billion package in September 2022, but its executive board approved the loan and agreed to disburse the first trancheonly on 20 March 2023 after the Sri Lankan Government fulfilled all the 15 conditions posed by the Fund. While the existing government is committed to implementing the IMF conditions, there are popular demands on the street not to implement some of the conditions which have a worse impact on the people. If a new government in the coming days gives into the popular demand and refuses to implement some of the conditions, disbursement of the balanced IMF aid will be suspended. This happened in 2019 when the Gotabaya Rajapaksa Government abandoned the EFF arrangement availed by the National Unity Government in 2016 as it refused to implement the IMF condition on the tax regime.

Even if the programme is fully implemented, there is a high probability of a sharp rise in poverty and unemployment rate during the programme period. Conditions under the IMF programme such as ensuring austerity measures and restructuring of public enterprises involve the risks of an increase in unemployment and poverty if an effective safety net for the needy is not in place.

Since there are risks involved and there is no guarantee of full disbursement of the IMF package, it would be prudent for the Sri Lankan government to have a contingency plan ready. Instead of looking at the IMF package as the most important solution to address the ongoing economic crisis, the Sri Lankan Government must consider it as one of the many measures and must focus on other measures tooto address the economic problems with equal attention. While Sri Lankan government must ensure that necessary measures are taken to complete the programme as has been announced on 20 March, it also needs to guarantee socio-political-economic and systemic change with a special focus on good governance.The Sri Lankan government must focus on an effective roadmap to bring the required reforms to come out of the economic mess as well as an effective safety net to reduce the economic burden on the common people instilled to avail the IMF package. It is high time the Sri Lankan government walked the talk.

The author is Associate Fellow, Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi.

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First published on: 24-03-2023 at 15:00 IST