IMF Bailout to Sri Lanka

Context:

The International Monetary Fund (IMF) announced a staff-level agreement with Sri Lanka, months after the island nation’s economic crisis intensified this year, following a serious Balance of Payments problem.

Relevance:

GS II: International Relations

Dimensions of the Article:

1. What is the staff-level agreement?
2. Is the $2.9-billion a bailout package?
3. About International Monetary Fund (IMF)

What is the staff-level agreement?

• It is a formal arrangement by which IMF staff and Sri Lankan authorities agree on a $2.9-billion package that will support Sri Lanka’s economic policies with a 48-month arrangement under the Extended Fund Facility (EFF).
  • However, even though the IMF has agreed to support Sri Lanka, the EFF is conditional on many factors.
• Sri Lanka must take a series of immediate measures that the Fund has deemed necessary to fix fiscal lapses and structural weaknesses — such as raising fiscal revenue, safeguarding financial stability and reducing corruption vulnerabilities.
• Apart from making domestic policy changes to strengthen the economy, Sri Lanka must also restructure its debt with its multiple lenders.
• The IMF has said that it will provide financial support to Sri Lanka only after the country’s official creditors give financing assurances on debt sustainability, and when the government reaches a collaborative agreement with its private creditors.

Extended Fund Facility:

• The EFF was established to provide assistance to countries experiencing serious payment imbalances because of structural impediments or slow growth and an inherently weak balance-of-payments position.
• An EFF provides support for comprehensive programs including the policies needed to correct structural imbalances over an extended period.

Is the $2.9-billion a bailout package?

• The $2.9 billion agreed upon by both sides, is short of Sri Lanka’s expectations of support totalling $3 to $4 billion.
• In any case, even if the IMF package arrives swiftly, subject to Sri Lanka’s success with the “prior actions” spelt out by the Fund, it cannot “bailout” Sri Lanka.
• After a pre-emptive sovereign default in April — the island’s foreign debt totals $51 billion — Sri Lanka is still grappling with its Balance of Payments crisis.
• The government has resorted to wide import restrictions, while exports remain limited to the country’s traditional basket of tea, garments, and spices.
• From the ordinary citizen’s point of view, cost of living is soaring.
• Headline inflation went up to 64.3% in August 2022, and food inflation increased to 93.7%.
  • The World Food Programme estimated that about 30% of Sri Lanka’s population, became food insecure, since the crisis worsened this year.

About International Monetary Fund (IMF)

• The International Monetary Fund (IMF) is an international organization headquartered in Washington, D.C.
• It consists of 189 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. It periodically depends on the World Bank for its resources.
• Through the fund and other activities such as the gathering of statistics and analysis, surveillance of its members’ economies, and the demand for particular policies, the IMF works to improve the economies of its member countries.

Functions of the IMF

• To provide financial assistance to member countries with balance of payments problems, the IMF lends money to replenish international reserves, stabilize currencies and strengthen conditions for economic growth.
• Countries must embark on structural adjustment policies monitored by the IMF.
• It oversees the international monetary system and monitors the economic and financial policies of its 189 member countries.
• As part of this process, which takes place both at the global level and in individual countries, the IMF highlights possible risks to stability and advises on needed policy adjustments.
• It provides technical assistance and training to central banks, finance ministries, tax authorities, and other economic institutions.
  • This helps countries raise public revenues, modernize banking systems, develop strong legal frameworks, improve governance, and enhance the reporting of macroeconomic and financial data.
  • It also helps countries to make progress towards the Sustainable Development Goals (SDGs).

-Source: The Hindu