India to IMF-World Bank: Classify Sri Lanka as low-income country for limited purpose of debt restructuring

India has urged International Monetary Fund (IMF) and World Bank (WB) to re-classify Sri Lanka as a lower-income country for the limited purpose of debt restructuring in light of the pandemic-induced shock to the country’s revenue.

Sources told BusinessLine that this along with some other suggestions by Finance Minister Nirmala Sitharaman during Fund-Bank meeting held in US recently. “Now, IMF has to take a call on the suggestion,” a source said while clarifying that India has not suggested for any permanent change. Further, he said the Minister had been actively engaging at the highest levels of the Fund-Bank meeting in support of Sri Lanka, in order to alleviate that country’s ongoing financial predicament, and to help it better navigate the maze of international financing rules and criteria.

According to sources, one of the key interventions made by Sitharaman was to argue that, although Sri Lanka was classified as a middle-income country at the start of the pandemic, the nature of the its economy, dependence on income from the tourism sector, and the resultant dip in national revenues due to the pandemic, has meant that the country might possibly be categorised as a lower-income country, and should be treated accordingly.

Debt service suspension intiative

At the start of the pandemic, IMF and WB worked together with the G20 countries to set up the Debt Service Suspension Initiative (DSSI). Established in May 2020, the DSSI helped countries concentrate their resources on fighting the pandemic and safeguarding the lives and livelihoods of millions of the most vulnerable people. Forty-eight out of 73 eligible countries participated in the initiative before it expired at the end of December last year.

The eligible countries for the DSSI included countries that are part of World Bank’s International Development Association (IDA) and all least-developed countries as defined by the United Nations.  Subsequent to this, in November of last year, the G20, World Bank and IMF came out with the ‘Common Framework for debt treatment beyond the DSSI’ (Common Framework) to support, in a structural manner, Low Income Countries with unsustainable debt.

“A classification as a lower-income country would ease the process of restructuring Sri Lanka’s debt. Due to Sri Lanka’s dependence on the tourism sector, the shock to the country’s economy was largely exogenous in nature.,” source said.

Emergency support to Sri Lanka

Further sources said the second intervention by Sitharaman had to do with encouraging similar short-term emergency support be given to Sri Lanka as was given to Ukraine.

On March 9, the IMF Executive Board greenlighted $1.4 billion in additional financing for Ukraine under an emergency support programme known as the Rapid Financing Instrument (RFI). It opens up quick access to financial assistance to countries that urgently need to eliminate mismatches in their balance of payments, in particular those arising due to war. The RFI is designed for cases where it is impossible to launch a full-fledged program of economic reforms.

Sources reiterated that Finance Minister’s efforts are part of an ongoing effort by India to aid Sri Lanka in whatever way it can. So far, that aid has come in the form of a Line of Credit (LoC) worth $1 billion to help Lanka procure food, medicines and essential items, another LoC worth $500 million to help it in purchasing petroleum products besides release of large quantity of diesel by Indian Oil.

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