The International Monetary Fund (IMF), on Monday, cleared a $3-billion-Extended Fund Facility (EFF) for Sri Lanka, potentially unlocking more loans for the debt-ridden island nation that is struggling to recover from last year’s economic meltdown.       

“The objectives of the EFF-supported programme are to restore macroeconomic stability and debt sustainability, safeguarding financial stability, and stepping up structural reforms to unlock Sri Lanka’s growth potential,” said the IMF of its 17th agreement with the island. Identifying corruption as a key issue, an IMF “governance diagnostic mission” has started assessing Sri Lanka’s governance and anti-corruption framework in its first such exercise in Asia, IMF officials said on Tuesday.   

The DC-based lender’s nearly $3-billion facility comes a year after Sri Lanka defaulted on its foreign debt amid an acute dollar crunch, and six months after the government reached a staff-level agreement. 

Sri Lanka is “no longer a bankrupt country”, said President Ranil Wickremesinghe in a televised address on Tuesday, adding that the IMF programme would “serve as an assurance to the international community that Sri Lanka has the capacity to service its debt”. 

In a tweet earlier, Wickremesinghe said there has “never been a more critical period” for Sri Lanka’s economic future. The IMF package enables Sri Lanka “to access up to $7 billion in funding from IMF & IFIs [International Financial Institutions]”, he noted while thanking Sri Lanka’s partners. 

India, Japan [as a member of the Paris Club group of creditors] and China, Sri Lanka’s top three bilateral creditors, played a crucial role in unlocking IMF assistance to the island, by providing financing assurances to the Fund. In an open letter to bilateral creditors last week, President Wickremesinghe promised that Sri Lanka would be transparent in the debt restructuring process and ensure “comparable treatment of all external creditors”.  

Although Sri Lanka has been desperate for the IMF’s assistance since last year’s financial crash, securing nearly three billion dollars from it, over a period of four years, hardly guarantees swift economic recovery, Sri Lankan economists have cautioned. The crisis-hit country has a long way to go before actual recovery, as its fundamental fiscal challenges of a huge debt burden, a persisting trade deficit, and a balance of payments problem remain.  In December 2022, Sri Lanka’s total outstanding public debt increased to $ 84 billion, according to Colombo-based think tank Verite Research. Further, the government must service multilateral debt totalling over $ 2 billion during the first half of this year.  

Protesting hardships    

Meanwhile, in anticipation of the Fund’s assistance, Sri Lanka took a host of policy measures over the last year, including sharply increasing banking interest rates, floating the rupee, raising taxes, and increasing energy tariffs three-fold. Reeling under high costs of living — and soaring electricity bills now adding to their burden — worker unions across sectors went on a strike recently, protesting economic hardships. While President Wickremesinghe held talks with union leaders, his government faces criticism for quelling protests, with frequent reports of police firing tear gas and water cannon at protesters.   

Asked about the IMF’s engagement with the Sri Lankan government amid concern over the space for dissent, Mr. Peter Breuer, Senior Mission Chief for Sri Lanka, Asia and Pacific Department of the IMF, told a media conference on Tuesday that the IMF’s ambit was “limited” to economic affairs, and the Fund did not have a mandate to interfere with how the government interacts with its citizens.  On Sri Lankan authorities postponing the local government elections, citing lack of finances, the senior official said: “we never recommended postponement of local government elections in Sri Lanka, we would not interfere in a country’s electoral and governance processes.”  

Asked whether the Fund’s earlier prescription of a wealth tax in Sri Lanka was still on the cards, Masahiro Nozaki, Mission Chief, said that a property tax and inheritance tax were envisaged in 2025.

Meera Srinivasan is The Hindu’s correspondent in Colombo