On 3 April 2022, the International Monetary Fund (IMF) issued a statement on Sri Lanka: “Going forward, the IMF team will support Sri Lanka’s efforts to overcome the current economic crisis by working closely with the authorities on their economic programme, and by engaging with all other stakeholders in support of a timely resolution of the crisis.”This research article makes the central argument – that IMF assistance could certainly facilitate Sri Lanka’s debt restructuring programme, but it comes with strict terms and conditions which the Sri Lankan Government must understand.
Developing the argument – Understanding the conditions to IMF assistance
The International Monetary Fund (IMF) is an international organisation that aims to accomplish a number of different goals. These include reducing global poverty,encouraging international trade, promoting financial stability, and economic growth. The organisation was created in 1945 and is based in Washington, D.C. There are a total of 190 member countries, each of which is represented on the group’s board. This representation is based on how important its financial position is in the world, so stronger, more powerful countries have a greater voice in the organisation than nations which are much weaker.
The IMF functions in three main areas: Overseeing the economies of member countries, Lending to countries with balance of payments issues, and helping member countries modernise their economies. The International Monetary Fund’s primary job is to promote stability in the global monetary system. So, its first function is to monitor the economies of its 190 member countries. This activity, known as economic surveillance, happens at both the national and global levels. Through economic surveillance, the IMF monitors developments that affect member economies as well as the global economy as a whole. Member nations must agree to pursue economic policies that coincide with the IMF’s objectives. By monitoring the macroeconomic and financial policies of its member countries, the IMF sees stability risks and advises on possible adjustments.
The IMF lends money to nurture the economies of member countries with balance of payments problems instead of lending to fund individual projects. This assistance can replenish international reserves, stabilise currencies, and strengthen conditions for economic growth. The IMF expects the countries to pay back the loans, and the countries must embark on structural adjustment policies monitored by the IMF.Lending through the IMF takes two forms. The first is at non-concessional interest rates, while the other comes with concessional terms. The latter is advanced to countries with low income, and bears very low or no interest rates at all. The third main function of the IMF is through what it calls capacity development by providing assistance, policy advice, and training through its various programmes. The group provides member nations with technical assistance in the following areas:
Monetary and exchange rate policies
Banking and financial system supervision and regulation
The organisation aims to strengthen human and institutional capacity. This is very important for countries with previous policy failures, weak institutions, or scarce resources. Through capacity development, member nations can help strengthen and improve growth in their economies and create jobs. Thus generally, we can conclude that the IMF is a friendly and a helpful institution with no underhand political agendas. However, working within the IMF’s terms is going to be challenging. No institution possesses unlimited funds and the IMF is no different. Thus, it is understandable that the IMF and its officials who make decisions on bailout or rescue packages and other forms of financial assistance will attach strict terms and conditions to any financial assistance granted.
The IMF is not going to ‘bailout’ Sri Lanka overnight – there will be several terms and conditions attached to IMF assistance. The condition to this is what is known as ‘debt sustainability.’ The IMF has stated that any financial assistance has to come with the assurance that Sri Lanka alters its current trajectory and turns on to a path of debt sustainability. The second condition is a commitment by the Sri Lankan Government to restructuring. Restructuring must be distinguished from a fiscal attempt to fix the debt problem-for instance by raising finances in the form of higher taxes to repay debt. Debt restructuring is an attempt by a country to systematically repay the debt in an effective manner. It is a mistaken belief that the bulk of Sri Lanka’s debt comes from other countries such as lending from China or India. The bulk of Sri Lanka’s debt has been accumulated due to borrowing by successive Sri Lankan governments of sovereign bonds from international capital markets.
In conclusion, this research article restates the central argument made in the introduction that IMF assistance could be effective, but one must understand the conditions attached to such assistance. This argument was developed by looking into concepts such as debt sustainability and debt relief. In summary, it must be noted that Sri Lanka must adopt a serious approach to resolving its international debt problem which includes assistance from the IMF. However, it must also play the game cautiously and slowly, seeking advice along the way and move slowly and cautiously on the chessboard.
The writer can be contacted at [email protected]
By Sachin Parathalingam