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Sri Lanka and the International Monetary Fund

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Sri Lanka & IMF Overview
Country Population:22.037 million
Date of Membership:29 August 1950
Latest Article IV/Country Report:13 June 2024
Special Drawing Rights (SDR):0.24 million
Quota (SDR):578.8 million
Number of Arrangements:17
Outstanding Purchases and Loans (SDR)1,351.45 million (30 June 2024)
Sri Lanka's Resident Representative:Sarwat Jahan
Part of a series on the
Aragalaya
Protesters protest in front of the Presidential Secretariat
Background
Existing political culture
Pre-2022 political instabilty
Economic crisis (2019–present)
Causes
Effects
Political crisis (2022–present)
Opponents & demands
  • Opponents
  • Demands

1. Resignation of President Gotabaya Rajapaksa 2. Accountability for corruption 3. Economic reforms 4. Access to essential services 5. Political reforms 6. Youth participation

Protests
Government overthrow
Elections of 2024
Legacy
Legacy

Sri Lanka joined the International Monetary Fund on August 29, 1950.[1] Since June 1965, Sri Lanka has taken 16 loans from the IMF, with a total value of 3,586,000,000 SDR's. The most recent of these loans was agreed to in June 2016, with an agreed total of 1,070,780 SDR's, and 715,230,000 SDR's being withdrawn. Of this total, 715,230,000 SDR's remain outstanding.[2] Notwithstanding the receipt of substantial soft loans from China, the island nation of Sri Lanka finds itself ensnared in a foreign currency crisis, prompting concerns among experts that it may be driven towards default. The current year places a heavy burden on Sri Lanka, with debt repayments amounting to approximately $4.5 billion, commencing with an initial payment of $500 million towards an international sovereign bond. It is worth noting that Sri Lanka holds a position of significant importance in China's ambitious Belt and Road Initiative.[3]

Constituency

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Sri Lanka is a part of a constituency with Bangladesh, Bhutan, and India. The representative of this constituency on the IMF executive board is Surjit Singh Bhalla. This constituency has 3.05% of the total voting power of the IMF. Individually, Sri Lanka has 7,247 total votes, or .15%[clarification needed] of the total voting power of the IMF.[4] Sri Lanka's current IMF quota is 578.6 million SDR's.[5]

History

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2016-2019 IMF intervention

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In 2016, Sri Lanka began an adjustment program, supported under the Extended Fund Facility.[6] The Extended Fund Facility supported agreement expired in June 2020. While foreign exchange reserve levels did recover from 2016 to 2019, reserves have declined sharply since the onset of the COVID-19 pandemic.[7] Similarly, Sri Lanka's current account balance briefly improved, but as of 2022, returned to exhibiting a large deficit.[8]

As per the IMF's statement, India has firmly pledged its commitment to aiding its distressed neighbor, Sri Lanka, in reducing its debt burden through a potential International Monetary Fund-backed initiative. The successful resolution with the IMF holds utmost importance for Sri Lanka's journey to recover from its most severe financial crisis in the past seventy years, highlighting the crucial role played by India's support. The longstanding friendship between India and Sri Lanka further fortifies the bedrock of this collaborative endeavor.[9]

2019-present economic and political crisis

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Amidst the country's current foreign exchange crisis, former Sri Lankan President Gotabaya Rajapaksa sought a $3 Billion loan from the IMF in April 2022. Opposition party leaders urged Rajapaksa to seek IMF assistance prior to April.[10] The governor of the country's central bank, P Nandalal Weeresignhe, echoed this sentiment.[11] Sri Lanka has also sought an additional $500 million line of credit from India, and began negotiating a credit line of $1.5 billion. Sri Lankan minister of finance Ali Sabry has stated "We are a neutral country. We are a friend to all."[10] In May 2022, Sri Lanka defaulted on its debt for the first time in the country's history.[12]

Negotiations between the IMF and Sri Lanka regarding lending to resolve the balance of payments crisis are ongoing. As of July 18, 2022 acting president Ranil Wickremesignhe stated that negotiations were nearing conclusion.[13]

Controversy

Washington Post columnist Ishaan Tharoor argues that the decision of the Rajapaksa government to accept a $3 billion line of credit from China to facilitate repayment of existing debts was an important factor in the development of the current crisis. Tharoor argues that rather than focus on long-term debt restructuring that may have resolved Sri Lanka's balance of payments crisis, Sri Lanka opted to pursue easy credit, resulting in eventual failure to repay outstanding loans. The article identifies this line of credit as a part of a broader trend referred to as debt trap diplomacy.[14]

Article IV consultations

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The 2021 article IV consultation for Sri Lanka was published in March 2022. The consultation warned of a rising current account deficit, referring to Sri Lanka's foreign exchange reserve levels as "critically low". Executive directors praised Sri Lanka's COVID-19 policy response and vaccination drive, but argued that Sri Lanka's public debt was unsustainable. The executive directors recommended an increase in the income tax rate and value added tax, among other fiscal policy reforms, and cost-recovery energy pricing. The report also raised concerns about rising inflation, arguing that a tighter monetary policy response would be necessary. Additionally, executive directors stressed the importance of long-term structural adjustments to increase female labor force participation, reduce youth unemployment, diversify the economy, and fight corruption.[6]

List of Loan Agreements

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History of Lending Commitments[15][16]
 No. Facility Date of Arrangement Expiration Date Amount Agreed, 000’ SDRs
(USD Millions)		 Amount Drawn
(%)[17]		 Amount Outstanding
1 SBA 15 June 1965 14 June 1966 30,000 (30) 22,500 (75%) 0
2 SBA 15 June, 1966 14 June 1967 25,000 (25) 25,000 (100%) 0
3 SBA 6 May 1968 5 May 1969 19,500 (20) 19,500 (100%) 0
4 SBA 12 August 1969 11 August 1970 19,500 (20) 19,500 (100%) 0
5 SBA 18 March 1971 17 March 1972 24,500 (25) 24,500 (100%) 0
6 SBA 30 April 1974 29 April 1975 24,500 (30) 7,000 (29%) 0
7 SBA 2 December 1977 1 December 1978 93,000 (112) 93,000 (100%) 0
8 EFF 1 January 1979 31 December 1981 260,300 (336) 260,300 (100%) 0
9 SBA 14 September 1983 31 July 1984 100,000 (105) 50,000 (50%) 0
10 SAFC 9 March 1988 8 March 1991 156,170 (214) 156,170 (100%) 0
11 ECF 13 September 1991 31 July 1995 336,000 (455) 280,000 (83%) 0
12 SBA 20 April 2001 19 September 2002 200,000 (254) 200,000 (100%) 0
13 EFF 18 April 2003 17 April 2006 144,400 (198) 20,670 (14%) 0
14 ECF 18 April 2003 17 April 2006 269,000 (368) 38,390 (14%) 0
15 SBA 24 July 2009 23 July 2012 1,653,600 (2,566) 1,653,600 (100%) 0
16 EFF 3 June 2016 2 June 2019 1,070,780 (1,507) 715,230 (50%) 715,230
Total (as of 30 September 2018) 4,426,250 3,585,360 715,230
17 EFF 20 March 2023 20 March 2025 2,286,000 (~3,000) 2,286,000 (395%)

See also

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References

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  1. ^ "List of Members' Date of Entry". www.imf.org. Retrieved 2022-07-17.
  2. ^ "History of Lending Commitments: Sri Lanka". www.imf.org. Retrieved 2022-07-17.
  3. ^ "Crisis-hit Sri Lanka asks China to restructure its debt". BBC News. 2022-01-10. Retrieved 2023-07-31.
  4. ^ "IMF Executive Directors and Voting Power". IMF. Retrieved 2022-07-17.
  5. ^ "Sri Lanka and the IMF". IMF. Retrieved 2022-07-17.
  6. ^ a b "Sri Lanka: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Sri Lanka". IMF. Retrieved 2022-07-17.
  7. ^ "Total reserves (includes gold, current US$) - Sri Lanka | Data". data.worldbank.org. Retrieved 2022-07-23.
  8. ^ "Current account balance (% of GDP) - Sri Lanka | Data". data.worldbank.org. Retrieved 2022-07-23.
  9. ^ "India commits to help Sri Lanka on debt in prospective IMF program". Reuters. 2023-01-23. Retrieved 2023-07-31.
  10. ^ a b Ghoshal, Devjyot; Jayasinghe, Uditha (2022-04-09). "EXCLUSIVE Sri Lanka to seek $3 billion to stave off crisis". Reuters. Retrieved 2022-07-17.
  11. ^ "Sri Lanka should have gone to IMF sooner, says central bank governor". BBC News. 2022-06-17. Retrieved 2022-07-23.
  12. ^ "Sri Lanka defaults on debt for first time in its history". BBC News. 2022-05-20. Retrieved 2022-07-23.
  13. ^ Jayasinghe, Uditha (2022-07-18). "Sri Lanka says IMF talks near end after declaring state of emergency". Reuters. Retrieved 2022-07-18.
  14. ^ "Analysis | China has a hand in Sri Lanka's economic calamity". Washington Post. ISSN 0190-8286. Retrieved 2022-07-23.
  15. ^ "History of Lending Commitments: Sri Lanka". www.imf.org. Retrieved 14 September 2024.
  16. ^ The Importance of International Monetary Fund Programmes (PDF) (Annual Report 2021 ed.). Central Bank of Sri Lanka. Retrieved 14 September 2024.
  17. ^ Collins, Adam; Kannangara, Pabasara. "The International Monetary Fund and Sri Lanka". The Lakshman Kadirgamar Institute. Lakshman Kadirgamar Institute. Retrieved 14 September 2024.
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