Thursday, April 25, 2024

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“Hard day’s night” for Sri Lanka in sticking to IMF Targets

By: Staff Writer

Colombo (LNW): Sri Lanka is emerging from its crippling economic crisis through stabilization efforts of President Ranil Wickremasinghe’s government with foreign aid likely pouring in to the country from donor countries and International Monetary agencies

With few far reaching policy choices the President is looking at India and Japan with his latest visit to the country of the rising sun with the aim of attracting investment, banking on an IMF US $ 2.9 billion bailout package to facilitate access to bilateral and multilateral financial support to get the economy back on track.

The IMF’s four-year US$2.9 billion program provides limited provision of liquidity. What matters is the program’s ability to catalyze other official lenders, private investors and creditor’s confidence in coming to the assistance of debt ridden island nation

Sri Lanka’s president has said that the International Monetary Fund (IMF) has approved its request for a $2.9bn bailout and the country’s presidency claimed that the economic program will enable it to access up to $7bn in overall funding.

The IMF’s board confirmed it has signed off on the loan, which clears the way for the release of funds and kicks off a four-year program designed to shore up the country’s economy.

The decision will allow an immediate disbursement of about $333mn, the IMF said, and will spur financial support from other partners, potentially helping Sri Lanka emerge from its worst financial crisis in decades.

But IMF Managing Director Kristalina Georgieva warned that Colombo must continue pursuing tax reform and greater social safety nets for the poor – and rein in the corruption that has been partly blamed for the crisis

But the standard IMF policy prescription that demands stringent financial discipline means that adjustment costs will be front-loaded, preventing the government from spending its way out of recession. Accordingly, taxes are being hiked and expenditures are being cut to stabilize the economy. .

The Country’s economic growth slowed to an annualized and seasonally adjusted forecast to contract by 3 percent in 2023 as it continues to grapple with the challenge of debt restructuring and balance of payments difficulties.

The increase in gross domestic product — the broadest measure of economic activity — was far below economists’ expectations of minus 2 percent and represents a more moderate pace compared to last year ,according to data released by the Finance Ministry.

In the absence of large debt service payments, the authorities have been able to manage the outflows (mainly the import bill) with inflows such as exports, tourism and remittances since the second half of 2022, leading to balance of payment surpluses (please see the latest Sri Lanka Development Update for more details).

These surpluses helped an accumulation of official reserves (US$700 million by January 2023, excluding the currency swap with China), and an improvement in net foreign assets in the banking system (US$-4.3 billion in January 2023, up from US$-6.4 billion in April 2022).

In addition, the lack of demand for imports from the real sectors and increasing expectations of an approval of the IMF program, contributed to a rise in foreign exchange liquidity, including through the unwinding of speculative Dollar holdings.

The above factors have led to an appreciation of the LKR against the US Dollar from February 27, 2023, somewhat easing inflationary pressures.

The good news now is that the Sri Lankan economy is showing signs of stabilizing. A return to growth in Sri Lanka is expected next year—the latest International Monetary Fund (IMF) forecast released in April 2023 suggests a less severe economic contraction of -3.1 percent in 2023 and growth of 1.5 percent in 2024.

Year-on-year inflation fell to 35.3 percent in April 2023. But negative growth in 2022-2023 means job losses across the economy, a doubling of income poverty to 25 percent of the population (at US$3.65 per capital, 2017 PPP) and child malnutrition as many families are switching to less nutritious diets.

Responding to crisis-hit Sri Lanka’s urgent request for external financing pending an IMF Programme, India mobilized the largest bilateral aid package in its history.

This aid was motivated by the unfolding humanitarian crisis affecting the Sri Lankan people, worries about a flood of refugees across the Palk Strait, and political pressure from South India. Indian aid of about US$4 billion during the first half of 2022 flowed to Sri Lanka through credit lines, loans, and grants.

India’s aid to Sri Lanka in 2022 far exceeds bilateral aid to Sri Lanka by other development partners and has cemented its reputation as a key emerging donor. India also undertook quiet diplomacy for Sri Lanka’s IMF Programme and just extended a US$1billion credit line to Sri Lanka until March 2024.

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