IMF loan alone cannot be a panacea

Foreign media reported this week that the International Monetary Fund (IMF) is considering approving its long-awaited loan for Sri Lanka, even without China’s assurance of debt-restructuring support. The approval of the loan has been delayed due to the lack of a formal assurance from China for debt restructuring support. Earlier this month the IMF said Sri Lanka’s $ 2.9 billion bailout package was set to be approved as soon as adequate assurances were obtained from bilateral creditors and met remaining requirements. 

The news the IMF may consider extending aid without assurances from China comes ahead of US Treasury Secretary Janet Yellen’s visit to India next week for G20 finance meetings, where the United States is expected to focus on unblocking debt restructuring for distressed countries such as Sri Lanka.

The Government of President Ranil Wickremesinghe built its legitimacy on the premise of being the only administration that could deliver a comprehensive economic recovery package, anchored on the IMF loan. The loan which was earlier expected to materialise in December 2022 is now projected to be delivered by March this year. The IMF reached staff-level agreement with Sri Lanka on the near three billion package last September, but its executive board has not yet approved the loan.

The Central Bank announced in April 2022 that it would suspend all debt repayment until a negotiated restructuring with its creditors. After a 30-day grace period to pay $ 78 million expired in May 2022 with the Government unable to repay its lenders, the country was officially in sovereign default or bankrupt in the eyes of the world. In total Sri Lanka is set to default on $ 12.6 billion of overseas bonds as the economy faces its worst crisis fuelled by a lack of foreign currency and surging inflation. 

Even if the IMF loan does materialise by next month, it is not going to be a panacea for Sri Lanka’s economic crisis. The fundamental cause of the current predicament is the unsustainable expenditure by the State spanning many decades. The IMF loan should be considered as a short breathing space in order to stabilise inflation and ensure the essential services required to keep the economy moving. The Government must address State sector spending, especially in maintaining loss-making State Owned Enterprises that haemorrhage resources. The Government would have to demonstrate courage and make tough decisions on cost reductions and generating higher revenues. One of the main priorities should be to reduce public sector expenditure. It will however have to be done cognisant of the tremendous hardships faced by the public. The need would be to prioritise the sectors that require expenditure while curtailing those that are not.

In this aspect the Government has shown little signs of austerity or seriousness in addressing unsustainable expenditure in the State sector. At the last budget presented by President Wickremesinghe, the Ministries of Defence and Public security were allocated a whopping Rs. 539 billion amounting to more than 2% of Gross National Product. It has also failed to deliver on any meaningful reforms of loss-making SOEs such as the Ceylon Electricity Board, Ceylon Petroleum Corporation and SriLankan Airlines. The current administration has also failed to address corruption and wastage within its ranks, further diluting its credibility for economic competence.

In this context the much-anticipated IMF loan would not be sufficient to rectify the economic woes of the country, unless the Government addresses the numerous structural flaws that contributed to the crisis in the first place.