The International Monetary Fund’s staff-level agreement with Sri Lanka 

What are the pre-requisites IMF laid down before the Sri Lankan government? How has India reacted to the agreement?

The story so far: The International Monetary Fund (IMF) on September 1 announced a staff-level agreement with Sri Lanka, months after the island nation’s economic crisis intensified this year, following a serious Balance of Payments problem.

It is a formal arrangement by which IMF staff and Sri Lankan authorities agree on a $2.9-billion package that will support Sri Lanka’s economic policies with a 48-month arrangement under the Extended Fund Facility (EFF).

However, even though the IMF has agreed to support Sri Lanka, the EFF is conditional on many factors. Sri Lanka must take a series of immediate measures that the Fund has deemed necessary to fix fiscal lapses and structural weaknesses — such as raising fiscal revenue, safeguarding financial stability and reducing corruption vulnerabilities. Apart from making domestic policy changes to strengthen the economy, Sri Lanka must also restructure its debt with its multiple lenders. The IMF has said that it will provide financial support to Sri Lanka only after the country’s official creditors give financing assurances on debt sustainability, and when the government reaches a collaborative agreement with its private creditors. The process could take several months.

Sri Lanka has already taken some significant policy measures. Beginning this year, the Central Bank has floated the rupee, raised interest rates sharply, increased electricity tariffs and fuel prices and restored tax cuts introduced during President Gotabaya’s time in office. While the government embarks on a path of fiscal consolidation, it has the difficult task of negotiating with a diverse group of creditors, including International Sovereign Bond (ISB) holders, to whom the island owes nearly half of its foreign debt, multilateral-lateral agencies, and foreign governments, mainly China, Japan, and India. While talks with the ISB holders are likely to be legal and technical, discussion with bilateral creditors is a more complex exercise, with geopolitical dimensions.

China has signalled its willingness to lend more money to the country but has put the onus of restructuring past debt on Sri Lanka. “We hope Sri Lanka will work actively with China in a similar spirit and work out a feasible solution expeditiously,” the Chinese Embassy said after the government firmed up the staff-level agreement with the IMF.

Japan has pledged to work with Sri Lanka and other creditors, but underscored that it is important for Sri Lanka, in collaboration with the IMF and Paris Club, “to work for the betterment of its economic and fiscal situation while securing transparency.” India, too, backs the IMF process and will likely cooperate, although New Delhi has said it is still studying the “evolving, unfolding” story of the IMF agreement. Ministry of External Affairs spokesman Arindam Bagchi said: “India has been advocating for assistance to Sri Lanka but let us see how it progresses. Issues of creditor equitability and transparency are important.” This means that India expects Sri Lanka to treat all its creditors equally and fairly. The statement comes amid speculation on whether Colombo might accord preferential treatment to one partner.

The IMF has indicated that creditors also have a role to play in ensuring Sri Lanka’s crisis does not deepen.