Sri Lanka struggling its way out of crisis, pinning hope on IMF bailout package

INTERNATIONAL DESK: As Sri Lanka could not get any assurance from China about debt restructuring despite its repeated request, it is now pinning all its hope on bailout package of the International Monetary Fund (IMF) to struggle its way out of the economic crisis it is enmeshed into for several months now.

China’s restructuring of Sri Lankan debt would have offered solace to the latter as this constitutes a major part of debt burden of the country.

Overall China’s loans and investments in Sri Lanka were estimated to be more than USD 8 billion in the last few years. But Beijing has not made a public commitment for debt relief assistance to Sri Lanka so far. It is estimated that Sri Lanka owes about USD 6.5 debt to China and its debt repayments are estimated at USD 1.5 to 2 billion in 2022.

As Sri Lanka is in talks with the IMF for a USD 2.9 billion bailout package on priority basis, Beijing’s statement in response the Colombo’s request for debt restructuring that “the ball is in Sri Lanka’s court” was both disappointing and hurting. So was its denial that Chinese loans and economically unfeasible infrastructure projects caused Sri Lankan crisis. The US has repeatedly alleged that “Beijing’s unproductive projects and opaque loan deals” among others, are the “main reason” for pushing Colombo into “economic bankruptcy” and so do many other obsrvors.

USAID administrator Samantha Power commended India for swiftly responding to help Sri Lanka tide over its economic crisis quite unlike China which didn’t respond with urgency.

Chinese assistance came too late and too little. She said that China has become one of Sri Lanka’s “biggest
creditors” offering often “opaque loans” with high interest rates.

Meanwhile Sri Lanka’s President revealed on August 30 that the country’s talks with the International Monetary Fund for a rescue package is nearing final stages after he presented an amended budget that seeks to tame inflation and hike taxes. One of the major conditions for finalizations of the IMF rescue package for Sri Lanka is the assurance from creditors that they would restore sustainability of Colombo’s foreign debt by restructuring, which might include moratorium on loans and reduction in interest payable.

China had communicated the Sri Lankan finance ministry three months ago about its readiness to discuss how to address the debt issue with the Chinese banks. But till now nothing concrete has come from Beijing in this regard.

Now, Sri Lanka is compelled to complete the agreement with the IMF quickly to stop the economy from sliding into bankruptcy. The President of Sri Lanka, who is also holding the portfolio of finance minister, claimed that
preliminary agreement on the bailout package with the IMF would be signed shortly.

The President told the Parliament while presenting revised budged 2022 on August 30 that the interim budget aims to lay the foundation for changing the economic policy which has landed up the country into economic crisis.

He asserted “we can no longer be a nation dependent on loan assistance.

We can also no longer be used as a tool of interference by other countries with strong economies.” He added that “several people are still unaware of how serious the financial crisis is and it is imperative to use this opportunity to correct past mistakes. The interim budget increases the VAT from current 12% to 15% with effect from September 1. He also committed to take measures to increase the revenue and gradually reduce the printing of money for government expenditure.

Sri Lanka’s total foreign debt exceeds USD 51 billion of which it must repay USD 28 billion by 2027. Although China denies its role in increasing Sri Lanka’s debt burden, it accounts for more than 10% of total debt of the
country.

The economic crisis in Sri Lanka lingers on. It has caused long queues for essential items, daily power outages, scarcity of fuel, gas and medicine, skyrocketing cost of living and deepening poverty and malnutrition.

Wickramesinghe, the President of crisis hit country asserted that Sri Lanka is on the “correct course in the short term recovery.” However, he warned that the country must prepare for at least 25 years of a national economic
policy, starting with the 2023 budget to put Sri Lankan economy on a higher growth path.

Nevertheless, the decline in Sri Lankan institutions marked by rampant corruption, authoritarian and divisive overnance, weak law and order and economic mismanagement are so deep routed that it would be posing serious challenge to Sri Lanka’s journey to recovery from the economic crisis and political uncertainty. Realising these deep routed problems, the President appealed to all political parties – “All this (economic reforms and political stability) can be achieved only if we work together in unity and common consent. I reiterate invitation to all parties represented in this parliament to join an all-party government.

” He added that this is an “unprecedented situation” and “it is the responsibility of all of us” to understand that we “need to prioritise the necessity of the country.” Sri Lanka’s journey is arduous. Things have only gone downhill since the pandemic. According to the Asian Development Bank’s April forecast, Sri Lanka’s economic growth will dip to 2.4% in 2022 and only improve marginally to 2.5% in 2023. There is no sign of early resolution of Sri Lanka’s woes, but IMF’s bailout package worth USD 2.9 billion would certainly provide a cushion in the immediate term, not only to facilitate the country to restructure its loans with the creditors, but also to take hard economic decisions.

However, a higher degree of political stability would be required for all that. Further, to make reforms palatable and acceptable to the people of Sri Lanka it would also be equally important to provide people food and social security and keep the cost of living low by better management of inflation. (https://trueceylon.lk/)