Significant progress in talks with Sri Lanka: IMF

The island nation is counting on the IMF to bail its economy out of crisis, with an Extended Fund Facility

The International Monetary Fund (IMF) on Thursday said it has made “significant progress” in talks with Sri Lanka, which has sought the global financial institution’s help to cope with its unprecedented economic crisis.

Concluding a ten-day visit to the island nation, an IMF team said: “Significant progress was made, and discussions will continue virtually towards reaching a staff-level agreement on the EFF arrangement in the near term.”

Outlining its proposal for Sri Lanka’s recovery, the Fund said in a statement: “The objectives of the new IMF-supported program would be to restore macroeconomic stability and debt sustainability, while protecting the poor and vulnerable, safeguarding financial stability, and stepping up structural reforms to address corruption vulnerabilities and unlock Sri Lanka’s growth potential.”

Sri Lanka is counting on the IMF to bail its economy out of crisis, with an Extended Fund Facility. The government is also looking to restructure its piling external debt with the IMF-backed programme. In April 2022, Sri Lanka announced a pre-emptive default on its nearly $ 50 billion foreign loans, amid a severe dollar crunch stemming from a balance of payments crisis.

Explaining Sri Lanka’s economic crisis

Sri Lanka is still heavily reliant on imports, more so after domestic agriculture production dropped by half after a controversial ban on chemical fertilizer last year.  The country spends about two billion on essential imports every month. Gross official reserves in March 2022 stood at $1,917 million, Central Bank data showed. This includes a currency swap from the People’s Bank of China, for nearly US dollars 1.5 billion, usable only based on certain conditions. Effectively, Sri Lanka has about 500 million dollars at its disposal, accounting for a week’s essential imports roughly, or a month’s fuel imports alone. With the government unable to pay for fuel imports, Sri Lankans are currently experiencing acute shortages of petrol, diesel and kerosene, as the country comes to a near-standstill.  

Prime Minister Ranil Wickremesinghe has warned citizens that the next few months would be “most difficult”, amid shortages and record inflation. India, Sri Lanka’s top lender this year, has extended about $ 3.5 billion assistance by way of currency swaps, credit lines and loan deferment. However, any further bilateral assistance from India or other partners, appears contingent on an IMF programme being finalised, officials in Colombo indicate.