Chennai: The International Monetary Fund’s (IMF) delegation to Sri Lanka made a formal announcement Thursday on the much-awaited staff-level agreement to help the crisis-hit nation, greenlighting a 48-month arrangement under the Extended Fund Facility of about $2.9 billion (Rs 23,088 crore).
Sri Lanka is currently going through its worst economic crisis since independence in 1948, ina meltdown triggered partially by a severe paucity of foreign exchange reserves.
Among the key elements of the agreement was “raising fiscal revenue to support fiscal consolidation”. A statement from the IMF noted: “Starting from one of the lowest revenue levels in the world, the programme will implement major tax reforms. These include making personal income tax more progressive and broadening the tax base for corporate income tax and VAT. The programme aims to reach a primary surplus of 2.3 per cent of GDP by 2025.”
Further, the IMF’s plan is to introduce a “cost-recovery based pricing for fuel and electricity to minimise fiscal risks arising from state-owned enterprises”. The staff-level agreement also indicated that it would mitigate “the impact of the current crisis on the poor and vulnerable by raising social spending and improving the coverage and targeting of social safety net programmes”.
The IMF statement elaborates on Sri Lanka’s acute crisis. “Vulnerabilities have grown owing to inadequate external buffers and an unsustainable public debt dynamic. The April debt moratorium led to Sri Lanka defaulting on its external obligations, and a critically low level of foreign reserves has hampered the import of essential goods, including fuel, further impeding economic activity,” it states.
It adds that Sri Lanka’s economy is expected to contract by 8.7 per cent this year and that “inflation recently exceeded 60 per cent” — the impact of which has been borne by the poor and vulnerable.
The IMF-supported programme, it adds, is meant to help the country “restore macroeconomic stability and debt sustainability, safeguard its financial stability, protect the vulnerable and step-up structural reforms to address corruption vulnerabilities and unlock Sri Lanka’s growth potential.”
Rehana Thowfeek, economist and associate at the Colombo-based think tank Advocata Institute, said that fiscal consolidation, tax reforms and reforms in energy pricing were expected, but it was good to see that the IMF’s plan also covered social safety nets.
“That has been a big worry in the country, whether the IMF plan will lead to health or education cuts. It is good that they have clearly stated that increasing coverage and spending on social safety nets is part of the programme,” she told ThePrint.
Speaking at a press conference in Colombo, IMF senior mission chief for Sri Lanka Peter Breuer said the arrangement was subject to approval by the IMF management and executive board in the period ahead. “It is contingent on the implementation of a number of prior actions by authorities, as well as receiving assurances from international partners, including bilateral and private creditors, on their financial commitments in support of the programme,” he said.
“If creditors are not willing to provide these assurances, that would indeed deepen the crisis here in Sri Lanka and would undermine its repayment capacity. A deepening crisis essentially means that the resources available to service the debt would become less. So, it is actually in the interest of all creditors to collaborate together…so that Sri Lanka can emerge from this crisis as quickly as possible and regain its repayment capacity,” he added.
‘Don’t have to wait for IMF package approval to bring reforms’
Breuer and IMF mission chief for Sri Lanka Masahiro Nozaki led a delegation from 24 August to 1 September in Colombo to discuss the IMF’s support to Sri Lanka and the authorities’ comprehensive economic reform programme.
Former Sri Lankan diplomat Dayan Jayatilleka told ThePrint that as the crisis had deepened, it had become increasingly obvious that the country would have to approach the IMF.
According to Thowfeek, the two things that have to come about for the arrangement’s approval are a reform package and a debt restructuring programme with Sri Lanka’s external creditors.
“If they are satisfied with both the reform package and the debt restructuring programme, then we can expect to get approval,” she said. “From the government’s side, the budget for next year, expected to be presented in November this year, will be key to determining how it plans to achieve this primary surplus by 2025,” she said.
The country needs major tax reforms, expenditure realignments, and reforms in state-owned enterprises, she said. “For example, on fuel and electricity, we have already gone to cost-recovery based pricing. The IMF will be looking to see how we implement this. There is a lot we can do. We don’t have to necessarily wait until the IMF package is approved. We just have to signal to them that we are serious about these reforms,” Thowfeek added.
The government, said Jayatilleka, is yet to come up with its plan for debt restructuring. “It should have enlisted the country’s best economists to do so, but it hasn’t,” he said.
IMF to introduce ‘stronger anti-corruption legal framework’
Nozaki noted in the press conference that the areas of “governance” and “anti-corruption” were very critical to the IMF. “It is the IMF’s policy to look at this issue in all our lending programmes. In this context, the programme, supported by the IMF for Sri Lanka, aims to reduce corruption vulnerabilities by fiscal transparency and public financial management, and introduce stronger anti-corruption legal framework,” he said.
Referring to the interim budget presented Tuesday in Sri Lanka’s parliament by President Wickremesinghe, Jayatilleka said: “…his new Budget revealed that he intends to push through ‘deep cuts’, as he calls them, which go beyond the IMF’s stipulations and may well trigger a strong social backlash. This is all the more so in a country which has recently witnessed a massive popular uprising which deposed President Gotabaya Rajapaksa, an ex-military officer.”
He also said that since the President lacks a popular mandate to govern, “it is probable that early presidential and parliamentary elections will be necessary to produce an administration which enjoys the public support necessary to implement an agreement with the IMF.”
With inputs from Regina Mihindukulasuriya in New Delhi
(Edited by Zinnia Ray Chaudhuri)