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Mint Explainer: Sri Lanka fails to secure next tranche of IMF bailout. Here’s why?
Summary
- The $3 billion bailout was agreed in March this year and Sri Lanka was hoping to receive the next tranche of funds, estimated at USD 333 million
The crisis-hit nation of Sri Lanka failed to get the next tranche of its bailout from the International Monetary Fund (IMF). The organisation cited key shortfalls in the country’s reform agenda. The $3 billion bailout was agreed in March this year and Sri Lanka was hoping to receive the next tranche of funds, estimated at USD 333 million. Mint looks at this development, which could threaten the recovery of the key Indian partner:
What is the background to this?
Sri Lanka has been suffering from an economic crisis since 2019. The Covid-19 pandemic and inept economic management caused severe shocks to the country’s economy. Runaway inflation, power and food shortages and dwindling foreign reserves created a perfect economic storm. In May 2022, Sri Lanka defaulted on its debt for the first time in its history. However, in March 2023, the IMF agreed to give Sri Lanka a $3 billion bailout This came with an immediate disbursement of USD 333 million to stabilise the country’s economy.
What’s happened now?
The IMF is concerned about Sri Lanka’s reform trajectory. While it acknowledged that Sri Lanka’s government has made progress on economic reforms, progress on key issues like revenue mobilisation continues to linger. Despite a two-week visit from an IMF team to Sri Lanka, an agreement to release the next tranche of USD 333 million in assistance could not be reached.
How does this impact Sri Lanka?
The economic situation in the country has stabilised somewhat. Inflation numbers are down and foreign reserves have grown. However, the situation is still far from ideal and this latest setback could starve the economy of the funds it needs to continue its recovery. Talks will continue between Sri Lanka and the IMF.
What comes next?
The IMF has been clear about what must happen before the next tranche of funding is disbursed. It has called for two things to happen. The first is an agreement with Sri Lankan authorities on policies that will improve the tax system, improve revenue collections and reduce the mismatch between revenue and expenditure. The second is a “clear path towards restoring debt sustainability".
How does this concern India?
Sri Lanka is an important partner for New Delhi. It provided USD 4 billion in economic support to the country to help shore up its economy and also issued a guarantee that allowed the IMF to provide Sri Lanka the bailout. India has also pushed for a solution to Colombo's debt crisis. This support has not gone unnoticed. It prepared the ground for the visit of President Ranil Wickremesinghe to India, during which a slew of economic cooperation projects were agreed upon.
