IMF clears $3­billion bailout for Sri Lanka

IMF clears $3­billion bailout for Sri Lanka

Subject: International Relations

Section: International Organization

Concept:

• The International Monetary Fund (IMF) has cleared a $3-billion Extended Fund Facility for Sri Lanka, which is struggling to recover from an economic meltdown.
• The IMF package will help Sri Lanka access up to $7 billion in funding from IMF and various other International Financial Institutions.
• An IMF “governance diagnostic mission” has also started assessing Sri Lanka’s governance and anti-corruption framework in its first such exercise in Asia.
• Sri Lanka’s top three bilateral creditors namely India, Japan and China played a key role in unlocking the IMF assistance to the country, by providing financing assurances.

IMF Bailout Conditions

• In September 2022, International Monetary Fund (IMF) and the Sri Lankan authorities reached a staff-level agreement to support Sri Lanka’s economic policies with a 48-month arrangement under the Extended Fund Facility (EFF) of about $3 billion.
• The objectives of Sri Lanka’s new Fund-supported program are –
  • To restore macroeconomic stability and debt sustainability,
  • Stepping up structural reforms to address corruption vulnerabilities and unlock Sri Lanka’s growth potential.

Extended Fund Facility

• The Extended Fund Facility (EFF) is a lending facility of the Fund of the IMF and it was established in 1974.
• The EFF provides financial assistance to countries facing serious medium-term balance of payments (BoP) problems because of structural weaknesses that require time to address.
• To help countries implement medium-term structural reforms, the EFF offers longer program engagement and a longer repayment period.
• Eligibility :All member countries of IMF facing actual or potential external financing needs are eligible.
• Conditions:Countries’ policy commitments are expected to focus on structural reforms to address institutional or economic weaknesses, in addition to policies to maintain macroeconomic stability.
• Duration :Typically approved for periods of 3 years, but may be approved for periods as long as 4 years to implement deep and sustained structural reforms.
• Repayment :Over 4½–10 years in 12 equal semi-annual instalments.

Has India availed the EFF in the past?

• In 1980, India had borrowed $ 3.9 billion ,a record amount then under an extended fund facility from the IMF.
• However, the then Government did not avail of the full amount as the economy recovered.
• During the 1991 economic crisis, India borrowed $ 2.2 billion from the IMF under two standby arrangements, between 1991 and 1993.
• A little over a decade later, India emerged as a creditor to the Fund — as its economy recovered and its balance of payments position improved substantially.