The International Monetary Fund’s (IMF) Director, Asia and Pacific Department Krishna Srinivasan commenting on Sri Lanka’s economic woes said that the next step for Sri Lanka would be to “flesh out a strategy” for domestic debt restructuring.
“The debt in Sri Lanka was assessed to be unsustainable. And that is why, before the program could be approved, there had to be a path toward restoring sustainability. That includes restructuring debt to all creditors -- private creditors, official creditors, and to some extent, domestic debt, for the simple reason that debt sustainability is quite a big challenge in Sri Lanka. But when you restructure domestic debt, you have to make sure that you also safeguard financial stability,” he told reporters during the IMF Regional Economic Outlook on Asia and Pacific Press briefing.
 Krishna Srinivasan |
Commenting on Sri Lanka’s inflation, he added that “it has come down albeit from high levels, an indication of work in progress.”
“Inflation has to come down durably because let us not forget, inflation is the worst tax on the poor, and the poor and the vulnerable are being hurt the most. You want to get inflation under control and that’s something which, again, in terms of monetary policy, with support of fiscal policy, has to bring inflation down to levels which are reasonable,” said Srinivasan.
He said that Sri Lanka with a quintessential problem with a twin deficit, a large increase in the fiscal deficits, puts pressure on the external accounts with reserves and exchange rates falling.
“That places the emphasis on one macroeconomic stabilisation - bringing inflation down. Fiscal consolidation is based on revenue-based consolidation. That is partly because Sri Lanka has among the lowest in terms of revenue mobilisation, and tax collection, and that goes back to the policy mistake they made pre-pandemic, wherein they cut taxes across the board, whether it is Value Added Tax (VAT), corporate tax, and personal income tax.”
He added that the Fund-supported program is a revenue-based consolidation that provides stability to the economy. “It also wants to rein in inflation, which went through the roof. It addresses governance and corruption issues in Sri Lanka. It’s the first country in Asia that has had a deep diagnostic on the issue of governance and corruption and that will feed into the program going forward.
“It’s also a program where we have a floor on how the country should support the poor and the vulnerable. To make sure that the fiscal support they provide is temporary and targeted to the people who need it most. It’s a very comprehensive program and the fiscal consolidation by itself will not be enough.”
He said that the next step for Sri Lanka is to make good faith efforts to reach a debt agreement with their creditors – both private creditors and official creditors. In terms of growth outlook itself, he said that there was a contraction of 8.7 percent in the economy in 2022, when Sri Lanka faced a massive economic crisis. “We have growth contracting at three percent in 2023 and then making a mild recovery. But the issue will be for Sri Lanka to implement the program so that debt can be made sustainable, which is a big difference from previous programs, and the country can be put on the path to prosperity.”
It was reported earlier in the week that Pakistan had overtaken Sri Lanka in terms of inflation, surging to a record high of 36 percent in April, as against 35.3 percent in the latter from 50.3 percent in March. In Sri Lanka, food inflation decreased to 30.6 percent in April from 47.6 percent in March and non-food inflation declined to 37.6 percent from 51.7 percent in March 2023.
Inflation in Pakistan, which has been struggling to secure a bailout package from IMF to avoid a default, soared to a record level because of a weaker currency, skyrocketing food prices, and rising energy costs. Pakistan’s Finance Ministry has projected that inflation would remain in the range of 36-38 percent mainly due to the Pakistani Rupee’s (PKR) depreciation and rising prices, which contributed to the increase in overall prices. The Pakistani Rupee is one of the worst-performing currencies globally so far, declining 20 percent to the US Dollar in 2023.