IMF bailout for Sri Lanka

Nearly a year in the making, a $3-billion rescue loan from the International Monetary Fund (IMF) is a lifeline for Sri Lanka. Economic mismanagement, coupled with the impact of the pandemic, led to the debt-ridden island nation facing its worst financial crisis since its independence. It ran out of cash for even the most essential imports, causing massive social and political unrest. This is the 17th IMF bailout for Sri Lanka. Its total external debt at the end of 2022, including to both bilateral and private creditors, was $82 billion, of which $2 billion has to be serviced by June. The IMF package is hardly sufficient to tide over the crisis, but will help the country restore its credibility with international private creditors and rein in its debt to sustainable levels. It is also expected to catalyse additional support from the World Bank, Asian Development Bank and other lenders.

On receiving the first tranche, President Wickremesinghe promised better fiscal discipline and improved governance. The government plans to raise funds by restructuring state-owned enterprises, but a massive strike by trade unions highlights the difficulties in enforcing painful economic and tax reforms. Last month, the inflation rate was 50.6 per cent. Tackling widespread shortages and a soaring cost of living is a huge challenge for Sri Lanka.

An assurance from bilateral donors to restructure loans was a precondition to unlock the arrangement with the IMF. India was among the first to extend support, but China, Sri Lanka’s largest bilateral creditor, played hard to get before the Chinese Exim Bank relented. Hopefully, realisation has dawned on Sri Lanka about the risks associated with Chinese debts. For Pakistan, the crisis is far deeper as it owes around $30 billion to China, or 30 per cent of its external debts. Bangladesh, which too has approached the IMF as a precautionary measure, owes nearly $5 billion to China. It should think twice before falling for Beijing’s debt-trap diplomacy.