Sri Lanka is running out of time to secure an IMF bailout

COLOMBO, Sri Lanka – Sri Lanka is seeking help from the International Monetary Fund (IMF) for its 17th program in seven decades, needing a bailout in place before its economy disintegrates and shortages worsen.

Why does Sri Lanka need the IMF’s help?

The country of 22 million people, located off India’s southern tip, is struggling to manage its worst economic crisis since independence in 1948.

It has a long history of rising foreign obligations, driven partly by incessant government deficits, and this has been worsened by a loss of tourism revenue in the pandemic and, this year, by surging fuel costs.

The resulting severe shortage of foreign exchange has stalled imports, including essentials such as fuel and medicines, and the country is also facing an impending food crisis.

To find a way out of the turmoil, Sri Lanka is in talks with the IMF to borrow at least $3 billion via the lender’s Extended Fund Facility (EFF).

An IMF program would not only give the country’s embattled government access to much-needed funds; it would also provide a pathway for Sri Lanka to eventually access international financial markets.

The country was officially declared in default for the first time ever last month after it halted debt payments.

How are the negotiations going?

Sri Lanka’s former finance minister Ali Sabry and new central bank governor P. Nandalal Weerasinghe started talks with the IMF on April 18.

On May 9, an IMF team began technical discussions with Sri Lankan authorities, just as a wave of violence swept through the country and the prime minister stepped down, leading to the dissolution of the entire Cabinet of ministers.

Sri Lanka was without a finance minister for the second time in as many months, while IMF talks led by officials concluded on April 24.

Meanwhile, the country picked Lazard and Clifford Chance as financial and legal advisers to help restructure more than $12 billion of overseas debt.

Another round of talks with the IMF is expected in early June, with a staff-level agreement possible at the end of the month.

However, an agreement that has IMF board approval will likely take at least until August, as it would require progress on a debt sustainability analysis, a structured examination of the country’s debt.

Sri Lanka’s new prime minister, Ranil Wickremesinghe, who is also serving as finance minister, would likely be part of discussions.

What does the IMF want?

An EFF program typically requires countries to make structural economic reforms to correct deep-rooted weaknesses.

The IMF said last week it was in talks with Sri Lanka for a comprehensive reform package but did not specify what type of program was being negotiated.

Wickremesinghe’s government already appears to be making some moves in that direction.

On Tuesday, May 31, it announced a taxation overhaul to boost revenue, lifting value-added taxes and corporate income tax and slashing the relief given to individual taxpayers.

Wickremesinghe is also working on an interim budget, to be presented within weeks, that he says will cut government expenditure “to the bone” and provide a relief package for the most economically vulnerable.

Why the urgency?

Millions of Sri Lankans have been battling shortages of essentials for weeks, including cooking gas, fuel, and medicines, sometimes queuing for days to procure minimal supplies.

The dire situation has stoked public anger against President Gotabaya Rajapaksa and his family, who are accused of mishandling the economy and delaying negotiations with the IMF.

Nationwide protests morphed into violence last month, leaving nine people dead and over 300 injured.

The government has also warned of an impending food crisis, with the country’s farmers running short of fertilizers. Experts estimate food production could drop by 50%, and the shortage of foreign exchange is a threat to importation of staples.

Further unrest could lead to more political turmoil, and also potentially affect negotiations with the IMF. – Rappler.com