IMF and the Sri Lanka bailout drama
Posted on May 6th, 2022

By Kandaswami Subramanian Courtesy The Indian Express

How many more International Monetary Fund programmes will Lanka need to put itself through to reach that manna of economic stabilisation?

IMF

This is not the first time that Sri Lanka has come out of a battle with the International Monetary Fund (IMF). It is sufficiently battle-scarred over the years since the sixties. As one study in Financial Times reported, …. Since 1965 Sri Lanka has been a ‘repetitive client’ of the IMF. The country has entered into 16 economic stabilisation programmes during 1965–2000. Macroeconomic management of the country has been under IMF programmes for approximately 33 of the 55 years.” It may raise a valid question: How many more programmes will Sri Lanka need to put itself through to reach that manna of economic stabilisation?  

Over the years of Sri Lanka’s tango with the IMF, we observe the same elements: drama, tension, reluctance to approach the IMF for succour and, lo and behold, failure to comply with the IMF conditions or conditionalities and, at times, the cancellation of the programme due to political upheavals. We may observe the same pattern whether it is Argentina, Brazil, Pakistan, Greece, Spain or Sri Lanka. The scenario is familiar. For some months when the crisis looms in the horizon, countries are reluctant to seek redress from the IMF as they are apprehensive about the hardships that flow from its austerity prescriptions. Once the crisis deepens and foreign lenders seek their pound of flesh, it becomes unavoidable to knock on the doors of IMF. The ratings agencies foretell the doom. There is also an advice that the pundits offer: The earlier you reach the IMF, the better the terms will be. Be aware.”  

For Sri Lanka, what was negotiated last week was the 17th programme. By early 2020, it was evident that the country was on the brink of economic bankruptcy and turmoil. Reputed economists and bankers began to warn about the forthcoming crisis. For instance,

Dr W A Wijewardhana, a former Deputy Governor of the Central Bank of Sri Lanka, wrote that the country was sitting on a volcano that could erupt at any time. According to his estimate, Lanka’s total foreign debt was a staggering $56 billion, which was  66% of the country’s GDP. The reserves were too low to take on the servicing burden. Rather, Lanka had to borrow to pay off the older debt. The Covid-19 pandemic too played a role in devastating the economy.

Though Lanka is classified as a middle income” country, it is not rich, diversified or resilient to manage a crisis. The tsunami took its toll and now it is the turn of the pandemic. Civil conflicts with the Liberation Tigers of Tamil Eelam (LTTE) had sapped the human and financial resources. Lanka’s foreign exchange earnings are from tourism, tea and a few agricultural products. According to estimates, tourism earned 10% of GDP and the earning reported was around $455 million a month in the earlier years. It shrank to $3 million in July 2021. Tea and agricultural exports shrank precipitously. The foreign exchange reserves were declining fast and Lanka’s ability to service the foreign debt came into question. The grim situation faced by the people of Lanka was described by the press and media. Long queues were seen around shops for rice, fuel and essentials. Lanka had to import many of the items and pay in dollars even as the foreign exchange reserves were dwindling and getting inadequate to foot the recurring payments. In October 2021, Jeevathan Selvachandran of The Asia & Pacific Policy Society wrote that the economic crisis is endangering Sri Lanka’s future”.

What was the government’s response? By January 2022, there were reports that Lanka was unlikely to seek IMF bailout and the Cabinet had failed to reach a consensus. Heroic statements were made by Finance Minister Basil Rajapaksa that Lanka would not default on debt and offered relief packages valued at one billion dollars. These could not stem the tide as the situation was getting out of control. In fact, the government had to stop all repayment of debt for the first time in its history. Bread riots erupted in major cities and in protest meetings, people demanded the resignation of the government. Driven to the wall, some members still hoped that China would come to their rescue with a sizeable relief package. The government’s ploy of pitting China against India didn’t seem to work. Perhaps, China’s own financial problems caused by the meltdown in the housing sector could have caused a setback. Moreover,  the Belt and Road Initiative (BRI) itself was under review. China’s hesitation at a crucial juncture was intriguing. In a belated announcement on Monday, the Chinese Ambassador to Lanka said that Beijing was unhappy that Colombo had approached the IMF when the former was negotiating for a loan-cum-grant of $2.5 billion.  

India played its limited role by extending lines of credit. These will facilitate purchase of essential supplies, fuel, medicine, etc. These are temporary sops that offer breathing space and do not promote growth. More like giving a lifeboat to save the country from sinking. Indian FM Nirmala Seetharaman claimed to offer full support to Lanka. One statement she made was that Lanka would need to be treated as a low income” country and allowed longer horizon for financial stabilisation. 

Is there a lesson from all these negotiations and parleys? Yes, the fault is in the IMF’s notion of stabilisation. This is an old debate and has been well settled. Unfortunately, while the need for change in the mindset is accepted, the message has not been driven home. The IMF seems to be too eager to ensure repayment of debt. Many development economists have drawn attention to its preoccupation with short-term stabilisation and its failure to safeguard the welfare of the people. No wonder that they abhor IMF programmes. Equally, programmes get repeated.

Kandaswami Subramanian

Served in the Ministry of Finance, GOI, and retired as Joint Secretary

(subrabhama@gmail.com)

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