Questions to those questioning Sri Lanka’s IMF program

President Ranil Wickremesinghe with IMF Managing Director Kristalina Georgieva

There has been a lot of criticism about Sri Lanka’s 17th IMF program from people of various backgrounds. They have made all kinds of accusations against the IMF program and criticised it. I agree that the IMF program is not the perfect solution. But the question is, what is the alternative? I am yet to see anyone who has offered a sensible alternative to the IMF.

What is the solution to the external debt restructuring?

Sri Lanka’s debt is a staggering 128% of GDP and half of it is external debt which is in foreign currency. Sri Lanka could not have repaid its debt if it had not defaulted. The debt has to be restructured. The bilateral creditors and the international sovereign bondholders may not have agreed to restructure Sri Lanka’s debt without the IMF. People may point out that Argentina restructured parts of its external debt in 2005 and 2010 without an IMF program. But these are exceptions and nearly a decade later in 2018, Argentina was back again on an IMF program.

The IMF is like an auditor. Sri Lanka’s creditors may not trust the Government of Sri Lanka but they look to the IMF to assess progress. When I say we do not have an alternative to the IMF, I am mainly referring to the question of external debt restructuring.  Creditors will most likely back out of external debt restructuring negotiations if there is no IMF involved. My question to those criticising the IMF and wanting the IMF gone, what is your alternative to restructuring Sri Lanka’s external debt?

What is the alternative to Sri Lanka’s high gross financing needs?

The gross financing needs of Sri Lanka was at 35% of GDP in 2022. Gross financing needs are overall new borrowing requirements and debt maturing that year. If not for the IMF program, the external debt restructuring would have been much more complicated, as creditors look to the IMF when assessing Sri Lanka. As Sri Lanka had already lost access to capital markets at the time it defaulted, we could not borrow externally at that time and even now from international capital markets. With the external gross financing needs at 9.4% of GDP at the time of default, if there was no willingness from our external creditors to negotiate Sri Lanka’s external debt without IMF involved, could we have continued to pay our external debt (owed to bilaterals and ISB holders) for nearly 2 years since we defaulted?

If we had to repay debt, with external gross financing needs at 9.4% without access to external borrowing, Sri Lanka would have faced a much darker period than the 12 hour power cuts and 3 weeks without fuel we experienced in 2022 as we would have had to cut down imports heavily to save the forex to repay debt. The only other way we could have repaid the debt due (maturity and interest) since default would have been through a fire sale of state owned enterprises at below market value to foreign investors. No other way to repay creditors since 2022 if the external creditors refused to negotiate (if there was no IMF) to a restructuring and demanded Sri Lanka repay.

Becoming an export oriented economy is a good solution but it is a long term solution as we cannot become an export oriented economy overnight either as that takes years to materialise.

The pause in repayment of external debt (except multilateral debt) for nearly 2 years is largely due to the creditors being reassured that the IMF is there. To those criticising the IMF, what is the alternative to the IMF in this situation? If the IMF leaves, and Sri Lanka’s external creditors stop negotiations and demand repayments, how is Sri Lanka going to repay? Is selling off state owned enterprises to foreign investors at dirt cheap prices due to desperation the alternative solution? Is completely stopping imports and bringing the entire country to a standstill (similar to July 2022) so we can get all the foreign exchange to repay external creditors, the alternative solution? If not, what else is the solution?

What is the alternative to accessing multilateral financing?

The $3 billion to be given under Sri Lanka’s 17th IMF program is not a large sum and many Sri Lankans misunderstand that we are in an IMF program just to access that $3 billion. The IMF is a catalyst. Other multilaterals such as the World Bank and the ADB, look at the progress of the IMF program when assessing their funding. Investors also look at the IMF assessment to be reassured about their investment decisions if they are to invest in Sri Lanka. What is the alternative to accessing finance from other multilaterals, improving our credit ratings and attracting investments if we say no to the IMF?

What about Malaysia which avoided the IMF?

Some mention the example of Malaysia under Mahatir Mohamed during the Asian Financial Crisis and say Malaysia avoided the IMF and managed fine. It is easy to quote Malaysia as an example without knowing the details and the context.

What they do not realise is that unlike Sri Lanka, Malaysia did not default on its debt and was not a bankrupt nation when it avoided the IMF during the Asian Financial crisis of the 1990s. Also, Malaysia’s debt to GDP ratio during the time of the crisis was only around 40% to GDP compared to Sri Lanka’s debt which was at 128% to GDP in 2022. Malaysia’s government revenue to GDP was around 20% in 1997 while Sri Lanka’s was less than 8% in 2022.

Sri Lanka is in a much worse situation than Malaysia was in 1997. Malaysia’s government debt was only 2 times its government revenue in 1997 while Sri Lanka’s government debt was almost 16 times its government revenue for 2022. If Malaysia’s situation in 1997 was like Sri Lanka’s situation today, Malaysia too may have had no other alternative but to go to the IMF.

Conclusion

We have seen so much criticism but yet to see a clear alternative to the IMF. This proves that the IMF is not the perfect solution and has its flaws but it is the only solution Sri Lanka has whether we like it or not.

(The author is an Economist and he is an expert member of the World Economic Forum. He is a regular columnist for the International Monetary Fund’s public finance forum and he was a member of the Deloitte Global Economist Network. The views expressed in this article are strictly the author’s own personal views.)