The International Monetary Fund (IMF) on Thursday approved a loan of $2.9 billion to Sri Lanka.

The International Monetary Fund (IMF) on Thursday approved a loan of $2.9 billion to Sri Lanka.

Subject : Economy

Section : External Policy

The International Monetary Fund (IMF) on Thursday approved a loan of $2.9 billion to Sri Lanka.

Sri Lanka IMF bailout–What happens next?

• The agreement between Sri Lanka and the IMF is only preliminary, and has to be approved by the IMF management and its executive board.
• It will also go through only if Sri Lankan authorities carry out previously agreed measures.

How will the IMF funds help Sri Lanka?

• The funds will be disbursed over four years to help stabilise the economy and boost growth.
• The package will help raise government revenue to support fiscal consolidation, introduce new reforms, bolster central bank autonomy and rebuild depleted foreign reserves.
• IMF loan will boost the receiving country’s credit ratings, and the confidence of international creditors and investors

What’s the situation in Sri Lanka now?

• Sri Lanka owes more than $51 billion in foreign debt, of which $28 billion has to be repaid by 2028.
• According to the IMF, the country’s economy will shrink by 8.7 per cent in 2022 while inflation rises to above 60 per cent.
• The Sri Lankan Government proposed a budget aimed at– increasing government revenue to around 15 percent of the GDP by 2025, cutting down public sector debt, controlling inflation and increasing value added tax to 15 per cent from the current 12%, revising the country’s deficit projection for 2022 to 9.8 per cent of the gross domestic product from 8.8 percent earlier.

Causes of the crisis?

• Depletion of forex reserves– A heavily import-dependent nation is left with just $2-billion reserves, leaving Sri Lanka not able to import even essential commodities.
  • Sri Lanka’s budget deficits were high during the civil war and the global financial crisis of 2008 drained its forex reserves
• Diminishing Inflow of Foreign Currency- The pandemic has affected all major sources of foreign exchange earnings like exports, worker remittances, etc.
• The collapse of the tourism industry-contributing nearly 10 percent of its GDP. The pandemic, coupled with the 2019 Easter bombings, led to a fall in the tourism revenues from $7.5 billion in 2019 to $2.8 billion last year.
• Agricultural Distress-blanket ban on chemical fertilisers by the administration last year and adoption of an “organic only” approach crippled the agriculture sector with tea cultivation and its exports, one of the mainstays of the economy, getting affected.
• Ukraine crisis-
  • A significant portion of tourists who travel to Sri Lanka are from Russia and Ukraine.
  • Sri Lanka exports its tea to these two nations and imports almost half of its wheat and sunflower oil from them.
  • The war has caused oil prices to spike, exacerbating its forex crisis.
• China’s Debt Trap-Sri Lanka has borrowed heavily from Beijing since 2005 for infrastructure projects, many of which became White Elephants (no longer needed/ useful).
  • Sri Lanka also leased its Hambantota port to a Chinese company in 2017 after it became unable to service the USD 1.4 billion debt from Beijing used to build it.