By Sugeeswara Senadhira
Colombo, January 23 (Ceylon Today): Two biggest lenders – China and India
– gave a green light to the International Monetary Fund for its proposed package for Sri Lanka. However, that alone will not erase the writing on the wall about the economic debacle in Sri Lanka, with foreign exchange reserves barely enough to cover two months of imports.
Top-level foreign government representatives and envoys who visited Colombo over the last few months praised Sri Lanka's resilience and the short-term revival of the economy, but emphasized the need for strict tax discipline, fiscal measures and long-term plans to get the economy back on track.
In April last year, the die was cast and the then government had to announce its inability to pay back loan instalments and external sovereign debt on time, following which Sri Lanka approached the IMF and the World Bank for a bailout package. In December, the World Bank approved Sri Lanka's reverse graduation, allowing it to access concessional financing meant for poor or highly vulnerable countries to which it graduated in 2017.
Although the IMF package of USD 2.9 billion would boost confidence in lending countries and investors, for present immediate requirements it is essential to implement unpopular tax decisions to go forward.
“The main reason for the economic crisis is weak fiscal policies. Lack of financial discipline was the main reason,” Treasury Secretary Mahinda Siriwardana said last week.
“Sri Lanka is still in a difficult situation. Sri Lanka should implement 2022 tax policies introduced in May and August.”
According to economists, Sri Lanka defaulted on foreign debt in April 2022 after taxes were cut and money was printed for stimulus. After two years of money printing, the Lankan rupee devalued to 370 from 200 per US dollar. The Central Bank raised the interest rates to slow credit and stabilize the currency from April 2022.
When the economic crisis started to bite mid last year, Sri Lanka appealed for assistance and the first country to come forward was India with assistance worth USD 4 billion. Then Bangladesh agreed to give a short moratorium on payments. China also came up with economic and humanitarian assistance.
Last week, President Wickremesinghe told Parliament that the Government has successfully completed its debt restructuring talks with India and China to satisfy the IMF's precondition that the bilateral lenders should come to an understanding before the IMF package is approved.
Thus, Sri Lanka sought financial assurances from its major creditors – China, Japan and India – to get the bailout package.
On the eve of India's External Affairs Minister Subrahmanyam Jaishankar's visit to Colombo, Additional Secretary of the Finance Ministry Rajat Kumar Mishra informed IMF Chief Kristalina Georgieva that New Delhi has confirmed its support to Sri Lanka on the issue of debt restructuring.
According to Beijing diplomatic sources, China too extended support to Sri Lanka on the IMF package. Last week, Vice Minister Chen Zhou, Head of the Chinese Communist Party (CPC) International Department assured Prime Minister Dinesh Gunawardena,“Sri Lanka is a very special friend of China and we are considering how we could assist Sri Lanka to get over the present crisis. You will have some good news soon.”
With this development, Sri Lanka is expected to get the IMF facility, which would enable the country to obtain bridging finance from markets and other lending institutions such as the ADB and the World Bank.
As Treasury Secretary Mahinda Siriwardana said, the Finance Ministry has to take tough measures. Central Bank Governor Nandalal Weerasinghe also repeatedly stressed the need to boost exports and get investment to get over the crisis. Indian External Affairs Minister Jaishankar conveyed India's commitment to increase investment flows to expedite the economic recovery of Sri Lanka.
Indian analysts said Sri Lanka's unprecedented economic crisis had paradoxically brought the best out of India's concerns for its Southern neighbor given the island nation's proximity in economic cooperation with China until then. Jaishankar incidentally became the first foreign dignitary to visit Sri Lanka during the economic crisis. His visit in March last year at the height of the crisis assured Sri Lankans that India's 'Neighborhood First' policy was pretty much in play.
“Sri Lanka is a close friend and neighbor, and India has stood with the people of Sri Lanka at all times,” the Ministry of External Affairs said in New Delhi.
The crisis was a result of not taking unpopular decisions. Those decisions are not popular but are now unavoidable
As President Ranil Wickremesinghe said.“If we do not take these decisions, there are questions whether as a country we can go forward. There is an unborn generation. There has to be a country left for them.”