Sri Lanka Inches Closer To $2.9-Billion IMF Loan Under EFF

In a breakthrough, IMF said in a statement Thursday morning that a staff-level agreement between IMF and the Sri Lankan government has been achieved. The agreement provides for $2.9 billion in assistance under Extended Fund Facility (EFF) over 48 months. The details of the agreement were made public on Thursday while the agreement seems to have been finalized on Tuesday. A staff-level agreement needs to be approved by the IMF management and the executive board to become effective. Sri Lanka had sought up to $3 billion from IMF. A crucial meeting in this regard took place late Tuesday evening between visiting IMF team and Sri Lankan government officials. President Ranil Wickremesinghe who also heads the finance department took part in the meetings with IMF.

However, IMF bail-out is contingent on economic reforms of the country. In his interim budget speech on Tuesday, President Wickremesinghe announced an increase of 3% in value-added tax from 12% to 15%, effective from September 1. As part of the economic and budgetary reforms, the country will set up a national debt management agency. The relief payout to the poor will be increased and a farm debt write-off will be introduced to help the vulnerable sections.

The nation’s foreign exchange reserves stood at $1.82 billion and the raw inflation figure at a record 60.8% in July. In the last year, the Sri Lankan currency has lost about 45% of its value. Sri Lanka’s $51 billion debts include $12.6 billion in sovereign bonds to global funds and an equivalent amount to bilateral and multilateral creditors.

As per the United Nations, over a quarter of the 22 million people are facing a hunger crisis. Poverty has become rampant as the shortage of essentials such as food and medicine continue. Media reports say that skipping meals, rationing medicines, and using firewood instead of cooking gas have become the new normal. Fish and meat are out of reach to many.

As desperation grows, incidents of thieves striking homes and stealing whatever they could lay their hands on are growing. People are not able to pay their water and electricity bills to meet the rising costs of food. Many of those without electricity and water connection are forced to take baths in public toilets.

On the political front, the ruling party Sri Lanka Podujana Peramuna (SLPP) party has asked President Wickremesinghe to bring Gotabaya Rajapaksa back to Sri Lanka and make him the Prime Minister to ensure political stability. Gotabaya belongs to Sri Lanka Podujana Peramuna (Sri Lanka People’s Front) which has 116 seats in 225-member parliament.

Former Sri Lanka President Chandrika Bandaranaike Kumaratunga has said that Sri Lanka’s economic crisis is a result of corruption over the two Rajapaksa governments and that she was thrilled to see the people’s movement overthrow them.

From the Indian perspective, Sri Lanka continues to be a problem. India has already offered $3 billion of assistance in the form of a line of credit in the last six months. But the recent docking of Chinese Military ship Yuan Wang 5 at the Hambantota port despite Sri Lanka once denying the permission and then giving up before the Chinese pressure underscores China’s influence on Sri Lanka. It not only provokes India to reconsider its largesse but also makes Beijing look walking away with a diplomatic victory.

Responding to the situation, Sri Lanka’s tourism minister Harin Fernando during a recent visit to India said, “Sri Lanka is a small country, and Sri Lanka has very good friendship with everyone.” Arguably, Sri Lanka doesn’t want to be caught in the India-China crossfire. “There is a lot of investment by the Chinese in Sri Lanka. I am sure India understands that. We have a very good diplomatic relationship with India,” he added. More recently, Sri Lanka’s High Commissioner to India Milinda Moragoda called on India to build a framework that deals with genuine maritime concerns and avoids a trust deficit.

So far, China has not conceded Sri Lanka’s request to defer loan repayments or release the new $2.5 billion loan it had agreed on. China’s engagement with Sri Lana’s economy and military over the past few decades when the island nation was grappling with ethnic conflict seems to have cemented the relationship stronger. Although India has been trying to increase its investments in Sri Lanka and has got some major projects in recent years, Chinese cumulative investments stand much higher. While Sri Lankans fear that China will further its interest by increasing investments in the country, they seem to be equally wary of India’s growing influence fearing it might jeopardize Sri Lanka’s sovereignty. (IPA Service)