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IMF steps in to rescue Sri Lanka’s ailing economy amid multiple crises

Sahana David Menon
By Sahana David Menon

Twitter: @sahanasometimes

Colombo: Sri Lanka has been grappling with multiple crises over the past few years, including the Easter Sunday bombing attacks in 2019 and the COVID-19 pandemic that hit the island nation. These crises have severely impacted the country’s economy, which shrank by a record 7.8 percent in 2022, according to the Central Bank of Sri Lanka (CBS).

To help the country get back on track, the International Monetary Fund (IMF) has approved a $3 billion bailout package for Sri Lanka, with the first tranche of $330 million disbursed last week.

IMF bailout conditions: the impact of privatization on workers and the economy

The IMF bailout comes with conditions that require the Sri Lankan government to undertake structural reforms to address the country’s underlying economic issues. These reforms include improving governance, enhancing the investment climate, and reducing the budget deficit. However, the government’s move to privatize state-owned enterprises to manage state expenditure, which was a precondition set by the IMF for the loan, has led to protests by workers’ unions. Thousands of workers have gone on strike to protest against the high costs of living, including increased taxes as part of the IMF bailout.

Picture credit : Daniel Rucka

The privatization has led to concerns about job security and the welfare of workers. The Ceylon Petroleum Corporation Trade Union Collective (CPCTUC) launched a hunger strike against the government’s decision to privatize the state-owned company, while the Ceylon Electricity Board Engineers Union (CEBEU) also protested against the privatization.

It is said rarely in its history has Sri Lanka experienced such a month of strikes as this March. The month began with a national walkout on day one, involving numerous union federations from both the public and private sectors. The focus of the mass protests was in particular the drastic tax increases, which hit hard especially those who, as employees, have a modest but usually adequate income.

The strikes have disrupted the country’s economy, with schools cancelling tests and hospitals’ outpatient departments closed, while railways also went on strike.

Some experts also have expressed concerns about the social impact of the IMF bailout package. The package includes measures such as the removal of subsidies on fuel and electricity, which could increase the cost of living for Sri Lankans already struggling with high levels of inflation and unemployment.

The IMF deal will help Sri Lanka to strengthen its fiscal position and promote better governance, according to President Ranil Wickremesinghe.

“This sets the stage for Sri Lanka to have better fiscal discipline and improved governance, this will create opportunities for low-interest credit, restore foreign investors’ confidence and lay the foundation for a strong new economy,” said President Wickremesinghe.

The country’s biggest bilateral creditor, China, has also agreed to restructure its loans to Sri Lanka, which was a necessary step for securing the IMF bailout. Sri Lanka aims to reduce its inflation rate to a single digit by mid-2023, and later to 4-6 percent. The National Consumer Price Index (CPI) in Sri Lanka rose by an annual rate of 53.6 percent in February.

The IMF funds can be used for government spending, in addition to bolstering foreign exchange reserves, unlike previous bailouts. According to government sources, the country’s officials will begin talks with bondholders and bilateral creditors in the third week of April to pave the way for the restructuring of the country’s debt.

picture credit : Daniel Rucka

Sri Lanka has received 17 IMF bailouts, and this is the third since the end of the country’s civil war in 2009. State Finance minister Shehan Semasinghe has said that Sri Lanka is prepared to engage in talks with bilateral and private creditors to restore debt sustainability as soon as possible. The government is optimistic that the IMF bailout will help restore foreign investors’ confidence in the country and lay the foundation for a stronger economy.

In addition, The Srilankan government has announced plans to implement a social protection program aimed at mitigating the impact of the IMF program on vulnerable groups. However, the effectiveness of these measures remains to be seen.

The country’s recovery efforts

The World Bank has provided $298.7 million in financing to support Sri Lanka’s COVID-19 emergency response and health system preparedness, while the Asian Development Bank has approved a $165 million loan to help the country address the economic impact of the pandemic.

One of the main challenges facing the Sri Lankan economy is the high level of debt.

Sri Lanka’s increasing debt burden has resulted in the government’s inability to guarantee human rights. The debt-to-GDP ratio rose from 93.6 percent in 2019 to 114 percent in 2021. In 2020, 71.4 percent of government revenue was spent on paying interest, which is significantly higher than the global average of 6 percent and regional average of 21.1 percent. Interest payments have been the largest category of government expenditure, and fresh borrowing was often used to pay off previous loans. This has reduced the government’s ability to spend on health, education, and social protection, which affect people’s welfare.

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 As of December, Sri Lanka’s external debt burden was estimated to be over $52bn, with almost 40 percent owed to private creditors and the rest to bilateral creditors, with China, Japan, and India being the largest ones

To address this issue, the IMF has called for Sri Lanka to implement a comprehensive debt management strategy that includes improving debt sustainability, strengthening debt monitoring, and enhancing debt transparency. The Sri Lankan government has also announced plans to increase revenue through measures such as improving tax collection and reducing tax exemptions.

Another issue facing the Sri Lankan economy is the lack of foreign direct investment (FDI). Sri Lanka has seen a decline in FDI in recent years, which has limited its ability to finance its development needs and create jobs. In 2020, FDI inflows to Sri Lanka declined by 58%, according to the United Nations Conference on Trade and Development.

To address this issue, the Sri Lankan government has announced plans to improve the investment climate and attract more FDI. The government has identified sectors such as tourism, agriculture, and manufacturing as priorities for investment and has introduced measures to simplify investment procedures and provide incentives to investors.

In conclusion, Sri Lanka’s economy has been hit hard by multiple crises, and the IMF bailout package provides much-needed support for the country’s recovery efforts. However, the conditions attached to the package require the Sri Lankan government to undertake structural reforms to address the underlying issues that led to the economic crisis.

The government’s program to divest state-run enterprises has faced protests from workers, and it remains to be seen how effective the measures to mitigate the social impact of the IMF program will be. The support from the international community is critical for Sri Lanka’s recovery, but it is also important for the Sri Lankan government to address issues such as high debt levels and the lack of foreign direct investment to create a stronger and more resilient economy.

Photo descriptions: A moment from the 2022 demonstrations in Kandy, Sri Lanka. People from all walks of life came together to demand change of system, governance and fight for a better future.

Sahana David Menon
Sahana David Menon
Foreign Correspondent (Sri Lanka) - Sahana David Menon is a multimedia Journalist | Researcher | Story Teller based in South Asia. Sahana is a Foreign Correspondent for TheNews21. She began reporting in 2014 from the post-Srilankan civil war-ethic conflicts and has since worked with Marginalized communities, conflicts and Environmental issues in India, Srilanka, the Bali islands, and the Middle east. Sahana has won the best multimedia report award in 2016 in the Global Press awards
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