Experts urge IMF to insist on governance reforms in Sri Lanka and reset debt targets

• Closed door event held in Morocco alongside IMF Annual Meetings

Experts who spoke at a closed-door event held alongside the International Monetary Fund (IMF) Annual Meetings in Morocco noted that the IMF must insist on governance reforms in Sri Lanka and cautioned that the targets in the ongoing IMF program could set Sri Lanka up for another default.

The event, titled ‘Sri Lanka: Pathways to Debt Sustainability and Governance Reform’ was held on Friday 13 October at the Kenzi Menara Palace in Marrakesh, Morocco. It was hosted by organisations connected to the ‘Sri Lankan Civil Society Initiative on Anti-Corruption Reform for Economic Recovery’, including Verité Research.

The speakers included Verité Research Executive Director Dr. Nishan de Mel, Transparency International Sri Lanka Executive Director Nadishani Perera and Global Sovereign Advisory Senior Research Analyst Theo Maret. The discussion was moderated by Jorgelina do Rosario from Thomson Reuters.

Dr. Nishan de Mel, underscored the foundational significance of governance in achieving debt sustainability in Sri Lanka. He emphasised the need for outcome-focused approaches and binding governance commitments from international entities such as the IMF, especially in a status-quo governance scenario like Sri Lanka’s. As a case in point, Dr. de Mel cited Sri Lanka’s incomplete IMF commitment to creating a fiscal transparency platform. He argued that fulfilling this commitment could serve as a powerful signal that the IMF places a significant focus on governance issues. Such actions, he noted, would be pivotal and key to addressing the foundational problems in Sri Lanka. Transparency was highlighted as a non-negotiable aspect, with Dr. de Mel urging immediate action to prevent moral hazard situations arising from lenient governance commitments.

Nadishani Perera pointed to the high levels of corruption, state capture, and the stifling of accountability actors as central governance issues hindering Sri Lanka’s development. She noted the critical role of International Financial Institutions (IFIs) and development partners in leveraging their positions to insist on governance reforms, given the dire straits in which the Sri Lankan populace finds itself.

Theo Maret expressed concern over the IMF’s debt sustainability model for Sri Lanka. The model’s unambitious targets, he argued, could set Sri Lanka up for another default. By comparing the IMF’s different sustainability models and targets set for countries like Zambia, he highlighted the need for a re-evaluation of the IMF’s approach towards Sri Lanka, especially concerning external debt restructuring targets. Maret emphasized the importance of setting separate program targets for external debt and urged a review of the market-access model used by the IMF for middle-income countries facing balance of payments difficulties.

Further to this, Dr. de Mel pointed out that the IMF’s debt sustainability analysis (DSA) was conducted over a year ago, and since then, the underlying assumptions have changed. However, he noted that conducting a new DSA was not feasible at this point given that Sri Lanka is in the final stages of debt restructuring negotiations. As a solution, he recommended considering the existing DSA as a minimum threshold for debt sustainability but given the altered circumstances, the ongoing negotiations should aim for a much safer zone beyond this minimum threshold.

He also drew attention to the fact that Sri Lanka’s allocation of over 70% of its revenue to interest payments, which is the highest in the world, is not a sustainable approach. He stressed the importance of reducing this figure ratio. However, he expressed concern that based on the current trajectory, Sri Lanka is unlikely to reduce it significantly below 50%, even with the ongoing negotiations, and urged for a change in this situation.

The event fostered a rich dialogue among various stakeholders, including professionals and high-ranking members of the Sri Lankan delegation to the IMF annual meeting. The discourse laid bare the complex interplay between governance reforms, debt sustainability, and the role of international bodies in navigating these challenges.

The consensus underscored the exigency of an integrative approach encompassing steadfast governance reforms, transparent accountability mechanisms, and strategic international engagements to propel Sri Lanka out of its prevailing economic crisis.

Sri Lanka defaulted on external debts in April 2022, and the IMF Executive Board approved a $ 2.9 billion Extended Fund Facility (EFF) 10 months later. This is Sri Lanka’s 17th IMF program and the first to include governance and anti-corruption as a core pillar.