In too deep – International Monetary Fund’s bailout package for Sri Lanka | 27th March 2023 | UPSC Daily Editorial Analysis

March, 2023 UPSC
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What's the article about?

  • It talks about the financial crisis in Sri Lanka and the IMF's bailout package to help them.

Relevance:

  • GS2: India and its Neighborhood- Relations; India-Sri Lanka
  • Prelims

Context:

  • Recently, the International Monetary Fund approved a $2.9 billion Extended Fund Facility (EFF) arrangement to support Sri Lanka as it addresses its ongoing economic crisis.
  • The 48-month extended arrangement will provide a much-needed injection of capital to fund essential imports and provide policy space for the Sri Lankan government to stimulate economic growth and facilitate structural reforms.

What is the Extended Fund Facility of the IMF?

  • The EFF provides financial assistance to countries facing short-term balance of payments issues that require longer-term structural changes to address.
  • The EFF programs typically have long-term engagement and allow for a longer-term repayment period, which aims to maintain policy space and enable the recipient government to implement structural reforms.
  • The EFF arrangement comes with strict conditionalities for economic reform.
  • The IMF demands that the Sri Lankan government reform its tax mechanisms and manage expenditure to tackle persistent budget deficits and bring spending in line with income.
  • The IMF also urged the government to continue its implementation of progressive tax reforms while introducing stronger safety nets to protect the poorest and most vulnerable in society.

IMF:

  • The IMF was established in 1944 in the aftermath of the Great Depression of the 1930s.
  • 44 founding member countries sought to build a framework for international economic cooperation. Today, its membership embraces 190 countries, with staff drawn from 150 nations.
  • The IMF is governed by and accountable to those 190 countries that make up its near-global membership.
  • The IMF's resources mainly come from the money that countries pay as their capital subscription (quotas) when they become members.
  • Each member of the IMF is assigned a quota, based broadly on its relative position in the world economy. Countries can then borrow from this pool when they fall into financial difficulty.

IMF and India:

  • India is a founder member of the IMF.
  • Post-partition period, India had serious balance of payments deficits, particularly with the dollar and other hard currency countries. It was the IMF that came to her rescue.
  • IMF granted India loans to meet the financial difficulties arising out of the Indo–Pak conflict of 1965 and 1971.
  • From the inception of IMF up to March 31, 1971, India purchased foreign currencies of the value of Rs. 817.5 crores from the IMF, and the same have been fully repaid.
  • In 1981, India was given a massive loan of about Rs. 5,000 crores to overcome foreign exchange crisis resulting from persistent deficit in balance of payments on current account.
  • India has not taken any financial assistance from the IMF since 1993.
  • Repayments of all the loans taken from International Monetary Fund have been completed on 31 May, 2000.

Analysis:

  • India’s proactiveness:
    • Taking credit for some of the heavy lifting, India’s Ministry of External Affairs has said that India was the first Sri Lankan bilateral creditor to support the debt restructuring and to provide assurances to the IMF in January.
    • Since last year, New Delhi has been a key part of Sri Lanka’s support structure, appealing on its behalf to the IMF and World Bank, extending a $4 billion package including credit lines, loans and debt deferrals, and raising the issue of debt sustainability at the multilateral sphere including the G-20.
    • China, Sri Lanka’s biggest bilateral creditor, and Japan (part of the Paris Club of international financiers) did not move as quickly, which held up the IMF announcement.
  • Sri Lanka’s perpetual issues:
    • However, the IMF decision is no magic pill. This is Sri Lanka’s 17th IMF bailout, and the third in the past decade.
    • The IMF loan also comes with a number of conditions, which will cause more hardships and make the government, that has about 10% approval ratings, more unpopular.
    • Adding to its discomfiture is the IMF distancing itself from the government’s decision to postpone local elections, saying it had made no political stipulations.
    • In its report, the IMF calls the risks to implementing the programme as “exceptionally high”, refers to Sri Lanka’s track record of implementing reforms as “weak”, and calls for contingency plans in case there is a deeper crisis induced by weak market indicators.
    • Apart from grappling with soaring inflation, stimulating growth and inviting global investment, the government must also ensure that creditors are satisfied with its debt restructuring process and no one accuses it of “side-deals”.

Way Forward:

  • Sri Lanka appears committed to turning the corner, and is mending fences with every international player engaged in its complex geopolitics, including the U.S., Japan, India and China.
  • It is important that in turn, they recognise Colombo’s precarious position and cooperate in shoring up the island nation as it continues to navigate a difficult economic path.



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