The International Monetary Fund’s approval of a 48-month arrangement with Sri Lanka, under the Extended Fund Facility for a $2.9 billion package, has been welcomed by Colombo and its creditors, who President Ranil Wickremesinghe will now have to conclude debt restructuring agreements with. Taking credit for some of the heavy lifting, India’s Ministry of External Affairs has said that India was the first Sri Lankan bilateral creditor to support the debt restructuring and to provide assurances to the IMF in January. Since last year, New Delhi has been a key part of Sri Lanka’s support structure, appealing on its behalf to the IMF and World Bank, extending a $4 billion package including credit lines, loans and debt deferrals, and raising the issue of debt sustainability at the multilateral sphere including the G-20. China, Sri Lanka’s biggest bilateral creditor, and Japan (part of the Paris Club of international financiers) did not move as quickly, which held up the IMF announcement. Announcing the first tranche of $330 million on Tuesday, Mr. Wickremesinghe said that the key message was to assure other lenders about Sri Lanka’s capacity to service its debt, and potentially enable it to access about $7 billion from international institutions and the IMF. Some credit is due to Mr. Wickremesinghe and his cabinet who have stabilised a few indicators since coming to power in challenging times last year.
However, the IMF decision is no magic pill. This is Sri Lanka’s 17th IMF bailout, and the third in the past decade. The IMF loan also comes with a number of conditions, which will cause more hardships and make the government, that has about 10% approval ratings, more unpopular. Adding to its discomfiture is the IMF distancing itself from the government’s decision to postpone local elections, saying it had made no political stipulations. In its report, the IMF calls the risks to implementing the programme as “exceptionally high”, refers to Sri Lanka’s track record of implementing reforms as “weak”, and calls for contingency plans in case there is a deeper crisis induced by weak market indicators. Apart from grappling with soaring inflation, stimulating growth and inviting global investment, the government must also ensure that creditors are satisfied with its debt restructuring process and no one accuses it of “side-deals”. Sri Lanka appears committed to turning the corner, and is mending fences with every international player engaged in its complex geopolitics, including the U.S., Japan, India and China. It is important that in turn, they recognise Colombo’s precarious position and cooperate in shoring up the island nation as it continues to navigate a difficult economic path.
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