IMF’s $3 Billion Bailout Programme for Sri Lanka

March 23, 2023

On March 20, the International Monetary Fund (IMF) cleared a $3 billion-Extended Fund Facility (EFF) for Sri Lanka, aimed at restoring macroeconomic stability, safeguarding financial stability, and unlocking the nation’s growth potential. Sri Lanka defaulted on its foreign debt in 2020, and this nearly-$3 billion facility comes after six months of the government’s staff-level agreement. President Ranil Wickremesinghe stated that the IMF program would “serve as an assurance to the international community that Sri Lanka has the capacity to service its debt.”

India, Japan, and China, Sri Lanka’s top three bilateral creditors, played a crucial role in unlocking the IMF assistance to the island by providing financing assurances to the Fund. In an open letter to bilateral creditors, Mr. Wickremesinghe promised that Sri Lanka would be transparent in the debt restructuring process and ensure comparable treatment of all external creditors.

Assessment of Sri Lanka’s Governance and Anti-Corruption Framework

Identifying corruption as a key issue, the IMF has started assessing Sri Lanka’s governance and anti-corruption framework in its first such exercise in Asia. The IMF “governance diagnostic mission” aims to help the country achieve debt sustainability, increase transparency, and promote inclusive growth. The assessment will also evaluate the effectiveness of Sri Lanka’s legal and institutional framework, as well as its anti-money laundering and combating the financing of terrorism (AML/CFT) regime.

Sri Lanka’s Fundamental Fiscal Challenges Remain

While the IMF package enables Sri Lanka to access up to $7 billion in funding from IMF and International Financial Institutions (IFIs), Sri Lankan economists have cautioned that securing nearly $3 billion over four years hardly guarantees swift economic recovery. The 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. Sri Lanka’s total outstanding public debt increased to $84 billion in December 2022, and the government must service multilateral debt totaling over $2 billion during the first half of this year.

Protests Amidst Economic Hardships

In anticipation of the Fund’s assistance, Sri Lanka implemented a slew of policy measures over the last year. These measures include drastically increasing banking interest rates, floating the rupee, raising taxes, and increasing energy tariffs three-fold. The high costs of living and soaring electricity bills have added to the burden of workers across sectors, leading to protests against economic hardships.

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