IMF approves $3-bn bailout for Sri Lanka

What’s in today’s article?

• Why in News?
• Brief Background on Economic Crisis in Sri Lanka
• Implications of the Economic Crisis in Sri Lanka
• IMF Bailout
• What is Extended Fund Facility?
• Has India availed the EFF in the past?
• News Summary

Why in News?

• The International Monetary Fund (IMF) cleared a $3 billion-Extended Fund Facility (EFF) for Sri Lanka.

Brief Background on Economic Crisis in Sri Lanka

Image Caption: Economic Crisis in Sri Lanka

• Sri Lanka is currently in an economic and political crisis of mass proportions, recently culminating in a default on its debt payments.
• There are several reasons for this crisis and the economic turmoil has sparked mass protests and violence across the country. Following is a brief timeline of events which eventually led to the crisis –
• 2009 –
  • In 2009, a decades-long civil war in the country ended and the government’s focus turned inward towards domestic production.
  • However, a stress on local production and sales, instead of exports, increased the reliance on foreign goods.
• 2019 –
  • Unprompted cuts were introduced on income tax in 2019, leading to significant losses in government revenue, draining an already cash-strapped country.
• 2021 –
  • The Sri Lankan government introduced a ban on foreign-made chemical fertilizers. The ban was meant to counter the depletion of the country’s foreign currency reserves.
  • However, with only local, organic fertilizers available to farmers, a massive crop failure occurred and Sri Lankans were subsequently forced to rely even more heavily on imports, further depleting reserves.

‹ ›

Implications of the Economic Crisis in Sri Lanka

• Sri Lanka is home to more than 22 million people who are rapidly losing the ability to purchase everyday goods.
• The government owes $51 billion and is unable to make interest payments on its loans, let alone repay the amount borrowed.
• And its currency had collapsed by 80%, making imports more expensive and worsening inflation that is already out of control, with food costs rising 57% by May, 2022.
• Due to power outages meant to save energy and fuel, schools were shut down.

IMF Bailout

In September 2022, International Monetary Fund (IMF) and the Sri Lankan authorities reached a staff-level agreement to support Sri Lanka’s economic policies with a 48-month arrangement under the Extended Fund Facility (EFF) of about $3 billion.

The objectives of Sri Lanka’s new Fund-supported program are –

To restore macroeconomic stability and debt sustainability,

Stepping up structural reforms to address corruption vulnerabilities and unlock Sri Lanka’s growth potential.

What is Extended Fund Facility?

• The Extended Fund Facility (EFF) is a lending facility of the Fund of the IMF and it was established in 1974.
• The EFF provides financial assistance to countries facing serious medium-term balance of payments (BoP) problems because of structural weaknesses that require time to address.
• To help countries implement medium-term structural reforms, the EFF offers longer program engagement and a longer repayment period.
• Eligibility –
  • All member countries of IMF facing actual or potential external financing needs are eligible.
• Conditions –
  • Countries’ policy commitments are expected to focus on structural reforms to address institutional or economic weaknesses, in addition to policies to maintain macroeconomic stability.
• Duration –
  • Typically approved for periods of 3 years, but may be approved for periods as long as 4 years to implement deep and sustained structural reforms.
• Repayment –
  • Over 4½–10 years in 12 equal semi-annual instalments.

Has India availed the EFF in the past?

• In 1980, India had borrowed $ 3.9 billion — a record amount then — under an extended fund facility from the IMF.
• However, the then Government did not avail of the full amount as the economy recovered.
• During the 1991 economic crisis, India borrowed $ 2.2 billion from the IMF under two standby arrangements, between 1991 and 1993.
• A little over a decade later, India emerged as a creditor to the Fund — as its economy recovered and its balance of payments position improved substantially.

·    

News Summary

• The International Monetary Fund (IMF) has signed an arrangement to provide External Fund Facility (EFF) of $3 billion for Sri Lanka.
• The IMF signed the arrangement after receiving requisite financial assurances to restore debt sustainability from the country’s biggest bilateral donors — China, India and Japan.
• The assurance from bilateral donors that they would support Sri Lanka’s debt restructuring was a precondition that Sri Lanka had to meet to unlock the arrangement with the IMF.

Q1) What do you mean by Balance of Payments (BoP)?

 The balance of payments (BOP) is the record of all international financial transactions made by the residents of a country. There are three main categories of the BOP: the current account, the capital account, and the financial account.

Q2) When was IMF established?

The IMF and the World Bank were created in July 1944 at an international conference in the United States (in Bretton Woods, New Hampshire) that established a framework for economic cooperation aimed at creating a more stable and prosperous global economy.

Source: IMF approves $3-billion bailout for Sri Lanka; tackling corruption a key condition | Indian Express