Essentials First, Debt Second

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Foreign debt restructuring or the postponement of such repayments, thereby saving the country’s sparse foreign reserves to be reallocated to meet scarce, but yet essential imports due to the lack of foreign exchange (FX) is the urgent need to stabilise the country.

Repaying debt from the country’s sparse foreign reserves, a policy initiated by Central Bank of Sri Lanka (CBSL) Governor Ajith Nivard Cabraal, but not having money to make essential imports like fuel, gas, coal, medicine and milk food to name a few,  doesn’t make sense. 

This unrealistic stance has led to mass scale protests due to shortages of essentials, threatening the very stability of the country.

In this regard, IMF’s Media Spokesman Gerry Rice, speaking from IMF Headquarters, in Washington, D.C. on Thursday said, “Sri Lankan authorities have indicated that they are actively considering an IMF-supported programme (loan).”

We will discuss with the authorities how best we can assist Sri Lanka going forward, including during Finance Minister Basil Rajapaksa’s visit to Washington in April. President Gotabaya Rajapaksa made a speech on Wednesday and expressed an intention to engage with the IMF to resolve Sri Lanka’s balance of payments problems, IMF said.

“Sri Lanka is facing mounting economic challenges. In the 2021 Article IV consultation recently concluded with the IMF Board meeting on 25 February, we highlighted the urgent need of implementing a credible and coherent strategy to restore macroeconomic stability and debt sustainability, while protecting vulnerable groups through strengthened, well-targeted social safety nets.

Subsequently, senior IMF staff visited Colombo from 14-15 March and had candid and fruitful discussions with the authorities on the current economic situation and policy priorities.”   In this connection, Sri Lanka, during this month, refloated the exchange rate after a near one-year lapse, raised fuel prices and policy interest rates, actions consonant with meeting IMF’s loan conditions. But more needs to be done by the Government of Sri Lanka (GoSL) to ‘appease’ the IMF. Those include raising electricity tariffs, gas prices and taxes, phasing out money printing and re-liberalising the economy once more among others as also enunciated by the IMF in a note dated 2 March. 

Seeking IMF aid comes in the backdrop that Sri Lanka has to repay a US$ 1 billion international sovereign bond which matures in July. IMF in this connection said the country’s foreign reserves which were US$ 5,664 million in 2020 fell to US$ 3,138 million last year, while further projecting it to fall to US$ 2,204 million this year. 

IMF also said public debt as a percentage of GDP rose from 110 per cent in 2020 to 118.9 per cent last year, while it’s estimated to further rise to 119.9 per cent this year. It further projected that the economy would have grown by 3.6 per cent last year after contracting by 3.6 per cent in 2020, while forecasting that growth would decelerate to 2.6 per cent this year.  IMF also predicted that the budget deficit would have been 11.4 per cent last year, declining from 12.8 per cent in 2020, before falling to 9.6 per cent this year. It estimated that the country’s current account deficit would have increased to 3.8 per cent last year, from 1.3 per cent in 2020, while stagnating at the 3.8 per cent level this year.

These fiscal parameters are unsustainable and need to be addressed urgently. But, IMF, understanding the pain that such reforms would cause to the poor has simultaneously asked the GoSL to initiate expenditure rationalisation. 

Slashing the Highways Ministry budget for instance, so that the moneys saved may be reallocated to the poor, is one thing that the GoSL could do immediately.

Sri Lanka seeking an IMF loan comes in the backdrop of CBSL Governor Cabraal being unrealistically opposed to such a move. But in the backdrop of the IMF Media Spokesman’s statement on Thursday, either Cabraal has changed his stance, or, despite the Governor’s opposition, GoSL, rightly so, is yet going ahead in securing an IMF loan to tide over the current economic crisis.