Finally … cleared the last hurdle
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So….Sri Lanka has cleared the final hurdle!I am referring to the much-awaited US$2.9 billion bailout package from the International Monetary
Fund (IMF).
But wait, I must refer dear readers to a phone call this Thursday morning with the topic being the IMF financial package. The conversation was with Arthika, my nonsensical economist friend also known as good-for-nothing Somey, who despite his nickname is a good friend.
“I say…..so we are getting the IMF funds, finally,” he said after exchanging the usual welcome.
“It looks like that. This is a big relief for Sri Lanka,” I said.
“Why did we delay seeking this facility? Were there political reasons?” he asked.
“The authorities in late 2021 when this facility was discussed may have felt that going to the IMF was not the best option because of the harsh conditions attached to a facility of this nature. Sri Lanka was struggling with a shortage of foreign currency and had more than $10 billion in interest and repayments due. But the authorities, misguided though, felt the country would be able to fulfil these payments,” I said.
“So, is the forthcoming IMF facility a win-win for the country,” he asked.
“On one hand it’s a win-win while on the other hand, we have to abide by somewhat harsh conditions and ‘cut the coat according to the cloth’,” I said. We then discussed many other issues and promised to meet soon.
A flurry of official measures were put in place last week and roadblocks cleared ahead of the proposed endorsement of the IMF facility. At long last, the US dollar was allowed to depreciate against the Sri Lanka rupee and has been hovering around Rs. 325 per dollar compared to Rs. 360 earlier.
On Friday (March 4), Central Bank Governor Nandalal Weerasinghe told reporters that the banking regulator will end the 15 per cent foreign exchange surrender rule shortly as the banking sector is now processing sufficient dollar reserves to finance essential imports such as fuel, cooking gas, medicines and other commodities.
He said his institution will intervene as and when necessary to provide assistance if there is any scarcity of forex for essential commodity exports. The Central Bank will also buy dollars to build reserves as and when necessary. Policy interest rates were also increased to stem inflation.
The once-tight foreign currency market has eased in recent times largely due to increasing migrant worker remittances coming into the banking system. And with the dollar taking a hit and easing against the rupee, remittances are likely to grow through official channels. In fact, in the private forex market (money changers), the dollar is said to be trading below rates offered by banks and there is sufficient dollar liquidity in the market, unlike the shortages experienced last year.
For the record, worker remittances in January 2023 rose to $437.5 million, a near 70 percent rise, when compared with $259.2 million in the same 2022 month. Earnings from tourism also rose marginally to $331.7 million in January-February 2023, compared to $321 million in the same 2022 months. Banks are reporting sufficient dollar funds for imports and services, partly due to the recent announcement of a $400 million infusion by way of loans by World Bank-affiliate IFC to the Commercial Bank of Ceylon, Nations Trust Bank and Sampath Bank, for essential food and medicine imports.
Topping all these developments, President Ranil Wickremesinghe told Parliament on Monday that the Government has received the letter of assurance from China’s Exim Bank on debt restructuring which was then forwarded to the IMF.
The IMF on Tuesday said Sri Lanka has secured financing assurances from all major bilateral creditors, paving the way for the IMF board to consider approval on March 20 of a long-awaited $2.9 billion four-year facility.
“Sri Lanka has now received financing assurances from all major bilateral creditors,” Krishna Srinivasan, director of the IMF’s Asia and Pacific Department (APD) said in a statement.
At this point, my mind wandered to the conversation by the trio under the margosa tree. “Den janathawa katha karanne Jathiyanthara Mulya Aramudalin gena. Mokakda mae (People are talking about the IMF. What is this?),” asked Mabel Rasthiyadu.
“Mama nisakawama danne nae. Eth mama hithanne eh lankawata pita-ratin mudal hambawena eka gena kiyala (I am also not sure but I think it is something about Sri Lanka receiving some money from abroad),” noted Serapina.
“Mamath danne nae. Eth samaharu kiyanawa eka suba lakunak kiyala lankawata (I don’t know but some people are saying that this is a positive sign for Sri Lanka),” said Kussi Amma Sera.
The IMF package will unlock much needed funds and loans from the World Bank and the Asian Development Bank in addition to providing a boost to other avenues of seeking foreign funds, apart from providing comfort to foreign investors aiming to pump money into the Sri Lankan economy.
Approval of the IMF package at the March 20 meeting would result in the immediate disbursement of around $400 million as the first tranche and trigger positive signals in the money market and the economy. However, there are daunting challenges ahead as conditions for the loan include increasing taxes, reducing the import bill, improving exports, cutting government spending particularly on loss-making state-owned enterprises and passing-on without absorbing fuel price hikes in the international markets among others.
According to the IMF, Sri Lanka has received $3.6 billion in the period 1965 to 2019 out of $4.4 billion under 16 agreements with a balance of $715 million not being disbursed in the last programme which started in 2016 and ended in 2019 without any successful completion. Seven of these agreements were terminated early. The most recent agreements were in 2003, 2009 and 2016 ($1.5 billion which was unfinished).
The facilities included Standby Arrangements, Structural Adjustment Facility Commitment, Extended Credit Facility and an Extended Fund Facility. Sri Lanka is not alone in South Asia in running to the IMF for much-needed funds.
Bangladesh, which lent $300 million towards Sri Lanka’s recovery, received a $3.3 billion facility from the IMF in January 2023, while Pakistan is awaiting IMF approval for a $1.1 billion loan.
As I wound up my column, Kussi Amma Sera walked into the room with my second mug of tea asking, “Sir, mokakda mae Jathiyanthara Mulya Aramudala kiyanne (Sir, what
is this IMF).” I smiled in response realising that while
the common man may find it hard to understand international funding arrangements, they would be beneficiaries of IMF support.
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