Picture Credit: the-quest website
Sri Lanka recently agreed to start discussions with the International Monetary Fund (IMF) in order to face its mounting forex and debt crisis. Formal negotiations are expected to start in April on a possible programme to boost reserves and start on the path to sustainable growth.
The foreign exchange shortage has resulted in authorities struggling to stay afloat. Paying for shiploads of fuel, and cooking gas has become a hassle. The energy sector, which almost completely depends on fuel imports, has been severely affected. There is also a scarcity of food and other essential commodities, which has brought on an increase in inflation, pushing it to a 25% just last month, the highest since Sri Lanka gained independence.
With the tourism sector being just about flattened by the COVID-19 pandemic and the foreign worker remittances having also declined, foreign exchange is in trouble. Real GDP has contracted by 3.6% in 2020. Having to repay approximately $4 billion in foreign debt within the year, and a $1 billion ISB maturity in July, will not help with the situation.
Foreign reserves have taken a dive, dropping from $7.5 billion (end of 2019) to $2.3 billion by the end of February. Experts say usable foreign reserves sum up to less than $400 million.
Picture Credit: Sri Lanka Guardian website
Sri Lanka’s wariness of an IMF programme for the past few months stems from the fact that in order to achieve the targets in a such programme would mean some of the key socio-economic policies of the ruling party would have to be compromised. However, according to sources, to recover from the crisis the government will be seeking assistance with debt restructuring, the foreign exchange crisis, improving revenue generation and reforming state- owned enterprises.
"Subsequent to my discussions with the International Monetary Fund, I have decided to work with them," the President said in an address to the nation following the meeting with an IMF delegation in Colombo.
The policy measures that Sri Lanka will have to come up with if it agrees with an IMF programme are likely to be strenuous. Some of the possible implications in a deal with IMF for Sri Lanka would be;
Reducing spending: if Sri Lanka is to go ahead with an IMF programme, the government would likely be asked to ensure transparency in public-funded infrastructures, and the government would have to go for competitive bidding. Of course, this means there will be an immediate action to put hold many big infrastructure projects planned by the government, especially if it is done with domestic borrowings.
Reforms would have to be made
Reducing fiscal deficit: in the event that Sri Lankan goes ahead with an IMF programme, the government may have to increase taxes in order to raise the revenue, or reduce government spending. The government will have to manage within the revenue, and reduce borrowings as much as possible.
Reducing inflation: tight monetary policies will have to be put into place. With the inflation at a record high double-digit (25%) as a result of excessive money printing in the past few years. With global commodity prices being pushed up, the depreciation of the Rupee will add to the inflation.
Picture Credit: The Straits Times website
Economist Rehana Thowfeek stated that the government has its work cut out in order to revive the economy. "The sooner a formal request is made (to the IMF), the sooner Sri Lanka can begin down the long and hard road ahead."
March 29th 2022 | 6:30 PM