Renewed hope for an IMF deal

This week the Government and the International Monetary Fund (IMF) reached a preliminary agreement that would give access to $ 2.9 billion in funds needed for crucial imports and financial stability. This deal still requires the final approval of the executive board of the IMF and is conditional to Sri Lanka reaching debt restructuring with its main creditors. After the sovereign default in April this year international capital markets have been shut to the country and a comprehensive bailout plan with the IMF and a debt restructuring mechanism with the key creditors will open these 

markets again. 

The IMF in a statement said, “Financing assurances to restore debt sustainability from Sri Lanka’s official creditors and making a good-faith effort to reach a collaborative agreement with private creditors are crucial before the IMF can provide financial support to Sri Lanka.” The staff-level agreement is for a loan under a 48-month arrangement that will be facilitated under the IMF’s Extended Fund Facility, which helps countries deal with balance of payments or cash flow problems. It will only be disbursed after satisfactory debt restructuring with Sri Lanka’s creditors.

The possibility of an IMF relief package comes as official inflation numbers have reached record highs. In August, inflation for food items reached nearly 94% on a year-on-year basis, and transportation costs had increased by nearly 150%, according to data released by Sri Lanka’s Central Bank 

this week.

As Sri Lanka embarks on a difficult economic recovery it is imperative to reduce State sector expenditure. Key among them should be the expenditure on defence. Sri Lanka which ranks at 58 according to the size of its population size has the 17th largest military in the world. In the 2022 budget, the highest allocation was made to the Ministry of Defence even while a pandemic was raging in the country. Expenditures on healthcare were reduced while education has remained stagnant for years. The reforms that are required in large, loss-making State-owned enterprises such as the Ceylon Petroleum Corporation and the Ceylon Electricity Board cannot be delayed any longer. Entities such as SriLankan Airlines which has bled the State coffers over a billion dollars in recent years must be immediately privatised or even shut down.

Despite the conditional optimism, the IMF too holds a responsibility towards the people of Sri Lanka to ensure that the relief it provides is for the betterment of the suffering masses and not to prop up a regime that lacks popular legitimacy and has even less credentials on transparency. In its dealings with the Wickremesinghe administration the IMF and Sri Lanka’s other economic partners owe a duty of care to ensure that democracy and human rights are protected by an administration which has shown scant regard for these principles. The declaration of a State of Emergency, the arrests of protesters and the use of the draconian anti-terror laws against perceived political opponents have elevated political tensions and opened the possibility of widespread social unrest.

As an administration that must deliver on difficult economic decisions, including the reduction of Government spending, it needs to carry the people with it in order to succeed. Alienating the masses through heavy handed measures while blatantly ignoring corruption within its ranks would only make the work of the Government even more difficult at this juncture.

It is hoped that the staff level conditional agreement reached with the IMF will be a turning point that would mark an economic recovery. It is upon the Government to ensure the correct conditions are established for its success.