Sri-Lanka IMF Bailout and IMF review

Subject: International Relations

Section: International Organisation

Context:

More about the Sri Lankan Bailout:

In September 2022, the 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 was –
- To restore macroeconomic stability and debt sustainability,
- Stepping up structural reforms to address corruption vulnerabilities and unlock Sri Lanka’s growth potential.

What is the International Monetary Fund:

The International Monetary Fund is an international organization that was established in 1944 to promote international economic cooperation, exchange rate stability and resources to member countries experiencing economic difficulties.
It is headquartered in Washington D.C., United States, and currently has 190 member countries.
It is governed by a Board of Governors, which is composed of one governor from each member country.
Each member country has a number of votes in the IMF based on its quota system which reflects a member’s relative size in the global economy.

How does the IMF help countries:

The IMF basically lends money, often in the form of special drawing rights (SDRs), to troubled economies that seek the lender’s assistance.
SDRs simply represent a basket of five currencies, namely theS. dollar, the euro, the Chinese yuan, the Japanese yen, and the British pound.
The IMF carries out its lending to troubled economies through a number of lending programs such as the extended credit facility, the flexible credit line, the stand-by agreement,
Countries receiving the bailout can use the SDRs for various purposes depending on their individual circumstances.

What are IMF Bailouts:

Bailout is a general term for extending financial support to a company/country facing a potential bankruptcy threat.
It can take the form of loans, cash, bonds, or stock purchases.
A bailout may or may not require reimbursement but is often accompanied by greater oversight and regulations.

What is 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.
All member countries of the IMF facing actual or potential external financing needs are eligible.

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.