An IMF-supported program should be designed to resolve Sri Lanka’s acute balance of payments problems and put the economy back on a sustainable growth path as early as possible, IMF’s Mission Chief for Sri Lanka Masahiro Nozaki told the Sunday Observer Business on Wednesday.
He said the IMF is concerned about the economic crisis in Sri Lanka and hardships suffered by the people, especially the poor and vulnerable and added that the Managing Director met the Sri Lankan delegation on April 18 for discussions which covered economic and policy developments, the authorities’ policy plans, and options of IMF lending for Sri Lanka.
The 2021 Article IV staff report published in March clarifies that, in IMF staff’s view, Sri Lanka’s public debt is unsustainable, the IMF Mission Chief said noting that when the IMF determines that a country’s debt is not sustainable, the country needs to take steps to restore debt sustainability prior to IMF lending.
Thus, approval of an IMF-supported program for Sri Lanka would require adequate assurances that debt sustainability will be restored, Nozaki said.
The specific design of Sri Lanka’s IMF-supported program, including the program targets and conditionality, would be agreed through extensive discussions between the authorities and IMF staff, and guided by the applicable IMF policies. The discussions are still at an early stage, he said.
The precondition of debt sustainability is also applicable to emergency financing such as a Rapid Financing Instrument. IMF emergency financing such as RFI provides rapid financial assistance in case of urgent balance of payments needs, including those arising from commodity price shocks, natural disasters, and conflicts. It is designed for situations where a full-fledged economic program is either not necessary or not feasible. These considerations would need to be examined for a potential RFI for Sri Lanka, once adequate assurances are obtained that debt sustainability will be resolved, the mission chief stressed.
The Rapid Financing Instrument (RFI) provides rapid financial assistance, which is available to all member countries facing an urgent balance of payments need. The RFI was created as part of a broader reform to make the IMF’s financial support more flexible to address the diverse needs of member countries. The RFI replaced the IMF’s previous emergency assistance policy and can be used in a wide range of circumstances.
The RFI provides rapid and low-access financial assistance to member countries facing an urgent balance of payments (BoP) need, without the need to have a full-fledged program in place.
It can provide support to meet a broad range of urgent needs, including those arising from commodity price shocks, natural disasters, conflict and post-conflict situations, and emergencies resulting from fragility. As a single, flexible mechanism with a broad coverage, the RFI replaced the IMF’s previous policy that covered Emergency Natural Disaster Assistance (ENDA) and Emergency Post-Conflict Assistance (EPCA).
The RFI is available to all member countries, although member countries eligible for the Poverty Reduction and Growth Trust are more likely to use the similar concessional Rapid Credit Facility (RCF). The RFI is designed for situations where a full-fledged economic program is either not necessary or not feasible in the face of a present BoP need that, if not addressed urgently, would result in immediate and severe economic disruption.
The former situation may arise when the shock is transitory and limited in nature, while the latter may arise when the member’s policy design or implementation capacity is limited, including due to the urgent nature of the balance of payments need or to fragilities.
There are two windows under the RFI: (i) a regular window, for situations described above, with access limits of 50 percent of quota in any 12-month period and 100 percent of quota on a cumulative basis, and (ii) a Large Natural Disaster (LND) window, for cases where the damage suffered as a result of a natural disaster is assessed to be 20 percent of GDP or more, with access limits of 80 percent of quota in any 12-month period and 133.33 percent of quota on a cumulative basis.
In response to members’ large and urgent Covid-19-related financing needs, access limits under these windows were increased temporarily until December 31, 2021. Since January 1, 2022, the annual access limits for the regular and LND windows have reverted to pre-pandemic levels of 50 and 80 percent of quota respectively. However, the cumulative access limits for both windows will continue to remain at 150 percent and 183.33 percent of quota respectively until June 30, 2023.