Crisis-Ridden Sri Lanka Negotiates for an IMF Bailout

Viewpoint by Nandi Jasentuliyana

The writer is a former Deputy Director-General, United Nations.

LOS ANGELES, CALIFORNIA (IDN) — Sri Lanka is experiencing a severe foreign exchange and debt crisis resulting in a shortage of food, fuel, power, and every other commodity to be purchased at exorbitant prices that the suffering masses cannot afford, forcing them to the streets protesting against the governing authorities.

Sri Lanka suspended its repayment of foreign debt, including bonds and government-to-government borrowings, pending the completion of a loan restructuring program with the International Monetary Fund to deal with the island nation’s worst economic crisis in decades.

The crisis has been years in the making due to bad governance and rampant corruption made worse by a spate of unexpected events. In recent years, Sri Lanka borrowed heavily from foreign lenders through international commercial borrowings, the Asian Development Bank, Japan, and China in that order for infrastructure projects.

A series of events intervened to make the situation in Sri Lanka grave. Beginning with a terrorist bombing of several churches and luxury hotels in Colombo in 2019, that resulted in a decline in tourism, an important source of foreign exchange.

The Covid pandemic exacerbated the situation taking a further toll on the country’s tourism economy, which accounts for12% of GDP. The government’s policy of prohibiting the use of chemical fertilizers and using exclusively organic fertilizer further strained the foreign exchange reserves. As a result, Sri Lanka’s foreign exchange revenues dwindled.

Facing a massive deficit, the government made a drastic tax cut in a failed attempt to stimulate the economy, severely affecting the government revenue resulting in rating agencies downgrading Sri Lanka to near default levels, denying it access to overseas markets.

As a result, Sri Lanka had to resort to foreign exchange reserves to pay off foreign debt, bringing down its reserves from $6.9 billion in 2018 to the current level of $2.2 billion. This limited imports of fuel and other essentials, which sent prices soaring. 

According to the country’s central bank, national consumer price inflation has almost tripled, from 6.2% in September to 18.5% in March. And Sri Lanka has to repay about $4 billion in debt over the rest of this year, including a $1 billion international sovereign bond that matures in July.

In the meantime, foreign direct investments into the country declined to $548 million in 2020, according to government figures, from $793 million in 2019. 

Sri Lanka’s public debt, which was already on an unsustainable path before the pandemic, has risen from 94% in 2019 to 119% of G.D.P. in 2021. The country’s trade deficit, the gap between imports and exports, is $10 billion leaving a foreign currency shortage.

Recently, a credit line of $1 billion was obtained from India to import essential items. India also extended a $400-million currency swap and a $500-million credit line for fuel imports. Sri Lanka has also asked China to restructure its debt repayments and requested a further $2.5 billion credit support.

Faced with little option, the government floated the Sri Lankan rupee in March this year, devaluing the currency to qualify for a loan from the International Monetary Fund (IMF) and encourage remittances. But the rupee plummeted against the U.S. dollar. 

The country saddled with high inflation and dwindling foreign reserves, and $25 billion in foreign debt, with $7 billion to be paid in 2022; the soft default was the only option to be followed by negotiating a $ 10 billion from the IMF to deal with the fuel crisis, energy shortages, essential imports, and loan repayments of this year.

Once the essential goods are made available and the protests subside, the government can look to restructuring both its commercial and governmental debt. 

Having first refused to do so, Sri Lanka has belatedly decided to seek the assistance of the IMF while continuing to seek the assistance of India, China, the Asian Development Bank, and the World Bank.

In the wake of the Covid, Pandemic IMF has been relatively lenient about setting preconditions in aiding countries. But negotiating a package with IMF to help resolve the economic crisis would require stability both as a government and a nation.

Sri Lanka first sought IMF assistance in 1965 and continued to seek its assistance up to 2002 under ‘Standby Arrangements,’ and received the last ‘Extended Fund Facility from IMF in 2016. Due to the opposition of the socialist parties, Sri Lanka has generally been reluctant to seek IMF assistance, and consequently, IMF should have no reluctance to entertain the request from Sri Lanka

It has been noted that in the past, Sri Lanka had been somewhat disappointed with the negotiations with the I.M.F., but it is also noted that Sri Lankan representatives don’t bargain but leave with dissatisfaction after IMF meetings.

That should not be the case this time around, as Sri Lanka has appointed a stellar team of world-renowned fiscal and monetary experts to assist in the critical negotiations with the IMF, which may hang the immediate fate of Sri Lanka.

It would be hard to find a more experienced team of experts immersed in international financial institutions’ operations than the team of advisors appointed for the pending IMF negotiations.

Yet, the task before them is a daunting one. With the state coffers empty, the production sector at a standstill, and recent sources of foreign exchange — remittances and tourism dried up; it is indeed a difficult task.

With the instability of the government and rampant protests and civil strikes, which might lead to sporadic violence, the IMF will be compelled to seek assurance of stability before reaching an agreement.

Such a conclusion would be hard to come by immediately, and even an emergency package might be held up by the prevailing instability within the executive, legislative and civil society. One can only hope the stellar team of experienced advisers would be able to shepherd the official team towards a productive end.

The advisory team leader, Dr. Indrajith Coomaraswamy, has taken over the mantel from his father, Rajendra Coomaraswamy, fondly known as Roving Raju with the begging bowl, an endearing term he earned because he was periodically dispatched to the World Bank in Sri Lanka’s post-independence years.

That was when he distinguished himself as Secretary to the Treasury from the days of Dudley Senanayake, Sir John Kotelawala, to the days of Sirimavo Bandaranaike—all former Prime Ministers. His days were more manageable with stability in the country with the tea, coconut, and rubber plantations churning out the foreign exchange.

Yet, Indrajith may be up to the task because of his education, experience, and, perhaps, genes. He is the Former Governor of the Central Bank of Sri Lanka. He was educated at Royal College, Colombo, and Harrow School.

After leaving school, he joined Emmanuel College, Cambridge, where he received B.A. (Hons) and M.A. degrees. He played first-class cricket for Cambridge University. He then proceeded to the University of Sussex, from where he obtained a DPhil degree. Coomaraswamy joined the Central Bank of Sri Lanka in 1973.

He was seconded to the Ministry of Finance and Planning between 1981 and 1989 to provide advice on macroeconomic issues and structural reforms. He worked at the Commonwealth Secretariat from 1990 to 2008, holding various posts and ending as Deputy Director of the Secretary-General’s Office. He was an advisor to the Prime Minister of Sri Lanka, Project Minister of Economic Affairs, and later a senior advisor to the Minister of Development Strategies and International Trade. 

That is a resume that cannot be bettered.

Santha Devarajan joins Indrajith. Two of them trace their ancestry to famous families of Jaffna in northern Sri Lanka. Their fathers were pathbreaking national and international civil servants.

As fate would have it, both Raju Coomaraswamy and B.R. Devarajan, who were members of the Ceylon Civil Service, ended up at the United Nations in New York and happened to be neighbors at a U.N. enclave where the United Nations International School (Primary Section) was located.

Living in the same locale as a young U.N. official, I was privileged to see the young Indrajith and Santha grow up while the fathers scaled the dizzy heights of the United Nations. Raju ended up as the Deputy Administrator of the U.N.D.P. and Deva as a Senior Director. The sons were not second to the fathers and ended up ascending dizzier heights of international organizations.

Santha Devarajan began his education at the United Nations International School in New York and went to the prestigious Ivy League Princeton University, where he earned his B.A. He completed his education at the University of California, Berkeley, where he received an M.A. and a Ph.D. Shanta was the Acting Chief Economist of the World Bank Group, succeeding the Nobel Laureate Paul Romer.

He co-directed the World Development Report. He was also a faculty member at Harvard University’s John F. Kennedy School of Government and is the author or co-author of more than 100 publications. He is presently a professor of economics at George University.

The duo of Sri Lankan legends on the international monetary and fiscal world is joined by equally formidable Sharmani Cooray. She was at the International Monetary Fund (IMF) and served as Director of the Institute for Capacity Development (I.C.D.), “Sharmini is one of the great leaders in the fund, and she has made incredible contributions throughout a stellar Fund career,” said IMF Managing Director, Kristalina Georgieva in a press release on the occasion of her retirement from the IMF after three decades.

Ms. Cooray’s leadership was key in providing strategic directions for the governance, management, and funding of the IMF’s capacity-building activities, making it an even more potent instrument in the service.

She holds a Ph.D. and a bachelor’s degree in Economics from Harvard University. She has published papers on inflation and economic growth in transition and developing countries and edited a book on managing the oil wealth of the C.E.M.A.C. region.

A pain-free IMF package is the objective of the Sri Lankan negotiating team. The official delegation will be composed of Dr P. Nandalal Weerasinghe, a ucareer central banker Ph.D. in Economics from the Australian National University, who served as the Deputy Governor before his retirement in 2021, and the new Minister of Finance, Mr. Ali Sabry, an experienced lawyer who will lead the delegation due to begin negotiations in Washington D.C. on the 18th of April.

The entire country will be hoping and waiting for them to use all their skills and bring back expeditiously a relief package that will alleviate the misery of a large section of the people of the Island, already enduring prolonged turmoil before the country reaches the point of no return. [IDN-InDepthNews – 17 April 2022]

Image source: BNE Intellinews

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