IMF concludes $2.9 billion interim loan agreement with Sri Lanka

The International Monetary Fund (IMF) on Tuesday reached a $2.9 billion deal with Sri Lankan officials aimed at bolstering the island country’s struggling economy.

Sri Lanka’s economy has been hit with a host of woes including a shortage of foreign exchange, high inflation, soaring public debt, worthless currency and a shortage of basic necessities.

The agreement includes Sri Lanka requesting access to approximately 2.2 billion Special Drawing Rights (SDRs), equivalent to $2.9 billion.

The SDR is not a currency, but rather the unit of account of the IMF, itself linked to a basket of currencies. An SDR is a potential claim on currency available to members of the IMF and can be exchanged for them.

This arrangement is a staff-level arrangement and would still require IMF Executive Board approval based on the findings of this mission.

An IMF mission visited Colombo as part of a series of meetings on both sides. They met with President and Minister of Finance Ranil Wickramsinghe, Governor P. Nandalal Weerasingh of the Central Bank of Sri Lanka and several members of Sri Lanka’s private sector and civil society, following which this measure was announced .

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*Terms and conditions of application

The agreement was signed under the Expanded Emergency Fund (EEF), which is an IMF program aimed at helping countries that need a helping hand the most with longer repayment terms, but aims to correct structural weaknesses and calls for in-depth reform. Such a reform is often painful for the borrower according to the conditions set out by the IMF.

While the IMF has stressed that such difficulty is crucial for long-term stability, a study has shown that it may have no effect. Between 2011 and 2013, 20 of the 22 countries that opted for an IMF borrowing program turned out to be regular borrowers.

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is 48 months and has several reform conditions.

To begin with, the program agreed with Sri Lanka aims to make several economic measures determined by the market. This includes reforms to energy pricing, foreign exchange, and a stronger, more autonomous, data-driven central bank.

Next, he also calls for Sri Lankan law reform, specifically naming a new Central Banking Act and a new Banking Act for a stronger financial system.

Primarily, the program also aims to implement major tax reforms. This includes a more progressive personal income tax (where the wealthy pay higher levels of tax), as well as a broader tax base (involving more citizens and entities will be taxed) by including a greater corporate tax base and value added tax. By 2024, the program aims to achieve a primary surplus of 2.3% of GDP.

(A primary surplus is an indicator of a government’s ability to get out of debt. It is the government’s budget deficit (or surplus), but the calculation of which does not include what the government spending on interest payments. If a government is running a primary surplus, it is considered able, at the very least, to pay the interest on time.)

Finally, the IMF calls for qualitative reform, in particular to reduce corruption by improving public transparency and the management of public funds and a stronger anti-corruption framework.

Sri Lanka entered a difficult economic situation earlier this year, starting with its inability to repay mounting external debts due to a shortage of tourism due to the COVID-19 pandemic and the 2019 Easter bombings. to an old-age economy and populist government programs.

The IMF program can be read here.

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