Promising reassurances | Sunday Observer

Promising reassurances

29 January, 2023

“We will bat for you” is a cricket term that one would not usually hear from the International Monetary Fund (IMF), which is usually headed by Americans or Europeans. But this time around, its Executive Director happens to be an Indian and naturally has cricket in his blood. Dr. Krishnamurthy Subramanian used this term when he met Prime Minister Dinesh Gunawardena to reassure the Government that the IMF is working towards granting the US$ 2.9 billion Extended Fund Facility (EFF) to Sri Lanka at the earliest available opportunity. Sri Lanka has to secure prior financing assurances from creditors, put its heavy debt burden on a sustainable path and boost public revenue before the global lender will disburse the funds, according to reports.

Dr. Subramanian, Chief Economic Advisor to the Indian Government  from 2018 to 2021, said the political will displayed by the Sri Lankan leadership to speed up reforms and implement difficult tax increases in order to revive the economy is highly appreciable. The Prime Minister in turn briefed the IMF delegation about the steps taken by the Government to face the unprecedented economic challenges and to enhance agricultural produce to meet local demand.

The good news for Sri Lanka, just ahead of its 75th anniversary of Independence, is that almost all the requirements for the IMF relief package for Sri Lanka have been completed and the moment the final assurances from major lending countries are received, the process would be finalised. Although Dr. Subramanian has not specified a time frame, Sri Lanka is likely to get the funds by April if donor assurances come through.

The first salvo in this direction was fired by neighbouring India, which itself celebrated its Independence Day on Thursday. In a missive to the IMF, Indian Finance Ministry official Rajat Kumar Mishra said: “We hereby confirm our strong support for Sri Lanka’s prospective (loan) program and commit to supporting Sri Lanka with financing/debt relief consistent with restoring Sri Lanka’s public debt sustainability. The financing/debt relief provided by Export-Import Bank of India will be consistent with restoring debt sustainability under the IMF-supported program.”

Apart from its assurance to the IMF, India has already provided about US$ 4 billion in rapid assistance between January and July last year, at the height of the economic crisis, including Credit Lines, a currency swap arrangement and deferred import payments. This was a lifeline that helped Sri Lanka to ride out the economic storm, although it was not enough to end a socio-political upheaval.  

China, to which Sri Lanka owes around US$ 7 billion, has also chipped in with the Export-Import Bank of China offering a two-year moratorium on debt and supporting Sri Lanka’s efforts to secure IMF funding. According to the letter sent to the Finance Ministry in Colombo, the Exim Bank said it was going to provide “an extension on the debt service due in 2022 and 2023 as an immediate contingency measure” based on Sri Lanka’s request and “the bank will support Sri Lanka in the application for the IMF Extended Fund Facility (EFF) to help relieve the liquidity strain”. This is a major relief for all those who were expecting a word from China on Sri Lanka’s chances with the IMF.

Japan, the other major donor nation, is also reportedly making efforts to secure the IMF facility for Sri Lanka. Japanese Vice Finance Minister for International Affairs, Masato Kanda, has assured that Japan is closely coordinating with international organisations, such as the Paris Club and the IMF to ensure the participation of non-Paris Club members in Sri Lanka’s debt restructuring plan, our sister newspaper the Daily News reported on Thursday. Indeed, if Japan itself and the Paris Club/OECD nations follow through with their written assurances to the IMF, Sri Lanka should essentially have no problem securing the IMF facility well before mid-year. This is likely to be issued in several tranches, as per the usual practice.  

Of course, there is no such thing as a free lunch and Sri Lanka will have to fulfill certain obligations and conditions to become eligible for the IMF facility. We are not even alone in this – Argentina, Pakistan and Bangladesh are more or less in the same boat. Countries that seek IMF assistance generally have to undertake painful economic reforms, which are highly unpopular with the public. But if one looks at these conditions closely, one clear fact emerges – these reforms have to be undertaken if we are to move forward, regardless of whether we receive IMF assistance or not.

For example, most Asian Governments have been subsidizing fuel prices for decades, bearing a huge loss in the process. But countries such as Sri Lanka which are still reeling from the adverse effects of the Covid pandemic and the global recession can no longer afford to subsidise fuel prices. This is no doubt painful for the consumer at the fuel pump, but there is no other alternative in sight. The same scenario applies to the provision of electricity and water to consumers.

None of these measures is popular and no Government will dare to implement them especially on the verge of an election unless there really is no other option. But now we have reached that stage where the Government has to sacrifice political popularity in the face of economic realities and imperatives. No country can succeed without its population undergoing some sort of hardship for a few years at least. If we face this stark reality and make some sacrifices now, there will be a much better economic outlook in the years leading up to the centenary of Independence.