'Progressive': Sri Lanka's $3 billion loan agreement will protect the poorest, says IMF

Washington, United States: Sri Lanka’s roughly $3 billion loan agreement with the International Monetary Fund (IMF) will look to protect the poorest while tackling deep-rooted economic issues, a senior IMF official told AFP on Monday.

The “progressive” agreement will be disbursed more or less evenly over four years and look to ensure that “those who can pay actually pay more, and those who need protection are protected,” the Director of the IMF Asia and Pacific Department, Krishna Srinivasan, said in an interview.

“It is targeted at the people who are going to be hurt the most,” he said. “The rich and the wealthy will be paying more.”

China assurances held up deal

Monday’s announcement comes almost a year after Sri Lanka defaulted on its foreign debt amid a deadly economic and political crisis which led to the resignation of the president and prime minister.

The new Sri Lankan president, Ranil Wickremesinghe, agreed the bailout program with the IMF back in September.

But issues with assurances provided by China – the country’s biggest bilateral lender – held up the deal for months.

Through a number of organizations, China held almost 20% of Sri Lanka’s public foreign debt in May 2022, according to research by the School of Advanced International Studies at Johns Hopkins University.

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“China provided one set of assurances, which for us wasn’t sufficiently specific and credible,” Srinivasan said. “So we had to go back to China, work with them.”

Coordination issues also rose when dealing with the different Chinese institutions that dealt with the South Asian nation’s foreign debt, he said.

‘Implementation will be key’

Since taking office, President Wickremesinghe has enacted a series of austerity measures in line with the IMF’s recommendations, sharply raising taxes and energy bills while slashing government subsidies.

The controversial moves have had some limited early economic success, helping to ease price rises down slightly from an annual rate of almost 70 percent in September 2022 to around 50 percent in February this year.

But the measures have also sparked widespread protests and strike action, with more industrial action scheduled in the weeks ahead.

Srinivasan said the IMF had found “broad recognition” from across the political spectrum of the need to address Sri Lanka’s dire economic situation.

“We feel confident that the government will go ahead with these reforms,” he said. “But implementation will be key for the success of the program.”

‘Reform fatigue’

Risks of “reform fatigue” could undermine the changes, Srinivasan said, adding that the IMF had consulted a wide range of people in Sri Lanka about the agreement, from non-governmental organizations to C-suite executives charged with risk management.

“I think there’s recognition that these are difficult times, reforms are needed,” he said. “The question is, how do you apportion the burden?”

“To restore debt sustainability, significant measures have to be taken on the fiscal side,” he said. “Debt is an overarching issue here.”

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