IMF not a panacea for all ills - Economist | Sunday Observer

IMF not a panacea for all ills - Economist

3 April, 2022

No amount of guidance and direction from the IMF would help Sri Lanka to come out of the economic crisis if the country has no long-term national plan to boost productivity directed at enhancing export earnings which would help maintain a healthy foreign reserves base, said Professor of the Faculty of Management Studies and Commerce, University of Sri Jayewardenepura, Anil Fernando.

Sri Lanka should move out from the habit of going for short term solutions through borrowings, seeking credit lines and swap arrangements to bridge deficits.

Unless and until a national program is in place to revive industries, increase productivity and earnings from exports, short term way outs will not be sustainable, the don said.

He said the IMF will help Sri Lanka as a member nation to wriggle out from the debt crisis and enable the country to re-negotiate debt with lenders which should be the immediate priority but without a solid program to resuscitate export earnings, earnings from the tourism industry and foreign remittances, reviving the economy would be only a pipe dream. Attracting FDIs will not be easy as investors will always look at the financial stability and policy direction of the country.

No investor would put his money to risky ventures or in a location that is replete with uncertainty, Prof. Fernando said.  The country lost around USD 2 billion in foreign remittances due the delay in floating the currency.

Had the lawmakers heeded the call to float the rupee one year ago the economy would not have been in this predicament today, he said.

However, the authorities should now take the advice of experts seriously and comply with the requirements to get out of the present mess, the don said.

Sri Lanka’s foreign reserves dropped to around US$ 2.3 billion in February and  is at its lowest level today while having to settle external debt to the tune of around US$ 3.9 billion this year with a sovereign US$ 1 billion sovereign bond maturing in July according to estimates. 

‘The Bloomberg’ reported last week that Sri Lanka faces “solvency” issues because of risks stemming from unsustainable debt levels that jeopardise the nation’s economy, according to International Monetary Fund staff.

“Based on staff analysis, the fiscal consolidation necessary to bring debt down to safe levels will need excessive adjustment over the coming years, pointing to a clear solvency problem,” the IMF said in its Article IV consultation report, released in Washington recently.

The full report provides further analysis of Sri Lanka’s debt and finances. A summary of the report released last month said Sri Lanka faced unsustainable debt levels and needed a “credible and coherent” strategy to restore stability. The country’s “debt overhang,” along with persistent fiscal and balance-of-payments shortfalls, “will constrain growth and jeopardise macroeconomic stability in the near and medium term,” the report said.

“Rollover risk is very high,” the IMF stated. “FX debt service needs of $7 billion each year will need access to very large amounts of external financing at concessional rates and long maturities, sustained over many years.”

Since the IMF board considered the staff report in late February, a surge in oil prices and the loss of tourists because of the war in Ukraine exacerbated its foreign exchange crisis, forcing the Government to seek IMF aid.

Negotiations on a possible aid package are expected to start in April, when Finance Minister Basil Rajapaksa travels to Washington.

The spiraling crisis has also led the country to raise interest rates, devalue the local currency and curb non-essential imports.

Sri Lanka has about $2 billion of reserves against $3.9 billion of foreign-currency debt due for the remainder of this year, according to ‘Bloomberg’ calculations based on central bank data. This includes $1 billion in sovereign bonds maturing in July.

“With the Government indicating that it is seeking a closer engagement with the IMF, the Central Bank of Sri Lanka stands ready to cooperate in such an engagement,” the monetary authority said in an amended statement recently.


IMF to begin talks with Lanka on loan program

WASHINGTON: The International Monetary Fund will initiate discussions with the Sri Lankan authorities on a possible loan program in the coming days, IMF spokesperson Gerry Rice said on Thursday, March 31. Rice said the discussions would continue during the visit of Finance Minister Basil Rajapaksa in Washington for the spring meetings of the IMF and World Bank.

A 70 percent drop in foreign exchange reserves since January 2020 has left Sri Lanka struggling to pay for essential imports, including food and fuel, leading to growing unrest and even military deployments at gasoline stations.

“The Sri Lankan authorities have expressed interest in an IMF-supported financial program,» Rice told a regular IMF briefing.

“We plan to initiate those program discussions with the Sri Lankan authorities in the coming days.»

Rice said the IMF would update its forecast for Sri Lanka when it releases its new World Economic Outlook next month, but gave no further details.

He confirmed that Rajapaksa would visit Washington for talks with IMF officials soon, as reported by Reuters last week.

Sri Lanka - which must pay about US$4 billion in debt this year - will also seek World Bank assistance after it enters into an IMF program, Reuters reported, citing two sources familiar with the matter. – CAN