Sri Lanka’s reluctance to tap IMF helped push it into an economic abyss

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COLOMBO — Sri Lanka’s worst financial disaster has triggered an unprecedented wave of spontaneous protests because the island nation of twenty-two million folks struggles with extended energy cuts and a scarcity of necessities, together with gas and medicines.

President Gotabaya Rajapaksa’s authorities has come below rising stress for its mishandling of the economic system, and the nation has suspended overseas debt funds in an effort to protect its paltry overseas trade reserves.

On Monday, Sri Lanka will start talks with the Worldwide Financial Fund (IMF) for a mortgage program, even because it seeks assist from different nations, together with neighboring India, and China.

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HOW DID IT GET TO THIS?

Financial mismanagement by successive governments weakened Sri Lanka’s public funds, leaving its nationwide expenditure in extra of its earnings, and the manufacturing of tradable items and providers at an insufficient stage.

The scenario was exacerbated by deep tax cuts enacted by the Rajapaksa authorities quickly after it took workplace in 2019, which got here simply months earlier than the COVID-19 disaster.

The pandemic worn out elements of its economic system – primarily the profitable tourism trade – whereas an rigid overseas trade charge sapped remittances from its overseas staff.

Ranking businesses, involved about authorities funds and its incapacity to repay massive overseas debt, downgraded Sri Lanka’s credit score rankings from 2020 onwards, ultimately locking the nation out of worldwide monetary markets.

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However to maintain its economic system afloat, the federal government nonetheless leaned closely on its overseas trade reserves, eroding them by greater than 70% in two years.

By March, Sri Lanka’s reserves stood at solely $1.93 billion, inadequate to even cowl a month of imports, and resulting in spiraling shortages of every little thing from diesel to some meals gadgets.

J.P. Morgan analysts estimate the nation’s gross debt servicing would quantity to $7 billion this yr, with the present account deficit coming in round $3 billion.

WHAT DID THE GOVT DO?

Confronted with a quickly deteriorating financial surroundings, the Rajapaksa authorities selected to attend, as a substitute of transferring shortly and looking for assist from the IMF and different sources.

For months, opposition leaders and consultants urged the federal government to behave, but it surely held its floor, hoping for tourism to bounce again and remittances to get better.

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Newly appointed Finance Minister Ali Sabry instructed Reuters in an interview earlier this month that key officers inside the authorities and Sri Lanka’s central financial institution didn’t perceive the gravity of the issue and had been reluctant to have the IMF step in. Sabry, together with a brand new central financial institution governor, was introduced in as a part of a brand new crew to sort out the scenario.

However, conscious of the brewing disaster, the federal government did search assist from nations, together with India and China. Final December, the then finance minister traveled to New Delhi to rearrange $1.9 billion in credit score traces and swaps from India.

A month later, President Rajapaksa requested China to restructure repayments on round $3.5 billion of debt owed to Beijing, which in late 2021 additionally offered Sri Lanka with a $1.5 billion yuan-denominated swap.

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WHAT HAPPENS NEXT?

Finance Minister Sabry will begin talks with the IMF for a mortgage package deal of as much as $3 billion over three years.

An IMF program, which generally mandates fiscal self-discipline from debtors, can be anticipated to assist Sri Lanka draw help of one other $1 billion from different multilateral businesses such because the World Financial institution and the Asian Improvement Financial institution.

In all, the nation wants round $3 billion in bridge financing over the subsequent six months to assist restore provides of important gadgets together with gas and drugs.

India is open to offering Sri Lanka with one other $2 billion to cut back the nation’s dependence on China, sources have instructed Reuters.

Sri Lanka has additionally sought an extra $500 million credit score line from India for gas.

With China, too, the federal government is in discussions for a $1.5 billion credit score line and a syndicated mortgage of as much as $1 billion. Moreover the swap final yr, Beijing additionally prolonged a $1.3 billion syndicated mortgage to Sri Lanka at the beginning of the pandemic.

(Reporting by Devjyot Ghoshal and Uditha Jayasinghe in COLOMBO; Modifying by Muralikumar Anantharaman)