Will aid from the International Monetary Fund be enough to restructure debts and save Sri Lanka’s economy?
Will aid from the International Monetary Fund be enough to restructure debts and save Sri Lanka’s economy?
the story So Far: on 12th April, Sri Lanka announces its decision to default on its $51 billion foreign debt, tarnishing its track record of early repayment of past loans. Citing the International Monetary Fund’s assessment that the country’s debt stock was “sustainable”, the finance ministry said foreign debt repayment policy Was “no longer valid” at the time. It described the default move as its “last resort” to prevent “further downside”. economic condition of the country, and ensure fair and equitable treatment of all creditors. In the coming week, Sri Lanka will hold talks with the International Monetary Fund (IMF) in Washington DC on a comprehensive debt restructuring programme.
What was the cause of the crisis?
Sri Lanka is facing one of its worst economic woes, For months, homes and businesses have faced severe food and fuel shortages while governments scramble for dollars to pay for essential imports. Incoming emergency financial aid, including from India, is barely enough to sustain the country for a month. With no roadmap or plan being shared by the authorities, fears of hunger and starvation are rising, and thousands are venting their anger against the government. Amid mounting protests, the government recently took two major decisions – to default on the country’s debt, and seek IMF’s support to restructure outstanding loans and save its crumbling economy.
Does a Loan Default Help?
Apart from Sri Lanka, no middle-income country has resorted to loan default in recent years. Typically, creditors and investors view a defaulting country as less favorable for business. This makes it difficult for the country to borrow from outside sources. If domestic production is low, as in the case of Sri Lanka, it is even more difficult to deal with.
At the same time, Sri Lanka’s pre-impact default takes the pressure off about $7 billion in debt repayments this year, giving the country some time to stabilize. In addition, the default move came just ahead of Colombo’s scheduled talks with the IMF, on the sidelines of spring meetings of the fund and the World Bank, to begin in Washington DC on April 18. The IMF is expected to come up with a package. Allow Sri Lanka to restructure its foreign debt over time. Such a program, including $2 billion in immediate relief, would make Sri Lanka more creditworthy in the international money market.
Meanwhile, how is Sri Lanka coping?
Citizens are finding it very difficult to get essential commodities including cooking gas and kerosene. Fuel is in short supply and now customers are being given ration after waiting in long queues. The prices of all basic commodities have risen sharply, making them affordable for most. Colombo is sourcing fuel and food supplies for the month using external help including credit lines from India.
What is the political fallout of this crisis for Rajapaksa?
This year since Sri Lanka’s economic slowdown intensified, President Gotabaya Rajapaksa’s government is facing a lot of pressure From citizens who have stood by their call for the resignation of President Gotabaya Rajapaksa and Prime Minister Mahinda Rajapaksa. Although the cabinet resigned en masse, none of the ruling brothers – who hold the public primarily responsible for their suffering – are unwilling to step down. Meanwhile, the shortage persists, and the prices rise, causing great hardships to the people. Even after the government announced its decision to suspend debt servicing and seek IMF aid together with a structural reform package, there is no confidence to be restored among the general public in the wake of massive protests.
How can an IMF program salvage a country?
Even with the help of IMF, the road ahead for Sri Lanka is neither easy nor straight. Senior Sri Lankan economists have observed that the situation is likely to get worse before it gets better, and there can be no gains without pain. Much will depend on the conditions imposed by the IMF and how Sri Lanka responds to the government’s political compulsion to regain lost ground. It is widely predicted that the fund’s recommended reforms will include greater taxation and reduction in state spending. What this might mean for the average citizen grappling with the shock of this economic disaster remains to be seen. It will be particularly challenging for the Rajapaksa regime, which has lost significant political capital in the wake of this crisis, to make and implement tough policy decisions that will be inevitable at this time.