https://sputniknews.in/20230322/imf-loan-unlikely-to-solve-sri-lankas-crisis-say-experts-1262750.html
IMF Loan Unlikely to Solve Sri Lanka's Crisis, Say Experts
IMF Loan Unlikely to Solve Sri Lanka's Crisis, Say Experts
Sputnik India
On Monday, the IMF confirmed to cash-strapped Sri Lanka that it would loan a $330 million tranche of a $2.9 billion bailout package in two days.
2023-03-22T20:43+0530
2023-03-22T20:43+0530
2023-03-22T20:43+0530
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Hours after International Monetary Fund (IMF) approved the island nation's request for a $2.9 billion bailout, Sri Lankan President Ranil Wickremesinghe said that his country is "no longer deemed bankrupt by the world". In a video address, Wickremesinghe said that the loan would restore the country's international recognition, revive confidence among foreign investors and help banks regain international recognition.According to President Wickremesinghe, the program would enable it to access up to $7 billion in overall funding. Speaking to Sputnik, economic analysts opined that rising debt from foreign banks, including the IMF, may benefit neither the citizens nor the country as this will lead to rising income tax, corporate tax, and son on, adding that the country may endure a long-term recession.Clouds Hover IMF Loan Rescuing Sri Lanka's Troubled EconomyDr. Gulbin Sultana, an analyst on Sri Lanka at the Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi, told Sputnik that the IMF loan is going to help the cash-strapped country for a short time as it is facing multiple crises simutaneously. Sultana, however, said a bailout may not end their problems. Another expert, Suranjali Tandon, Assistant Professor at Delhi-based National Institute of Public Finance and Policy, sharing his analysis of the loan said: "The fund facility by the IMF is a temporary relief for the country as its public debt levels are approximately 130% of the GDP and a large fraction of these are foreign loans."According to the World Bank’s figures, by the end of 2022, Sri Lanka had an external debt burden of more than $52 billion, of which about 40% is owed to private creditors and the remaining from bilateral creditors — China (52%), Japan (19%) and India (12%).What's Wrong With IMF's Austerity Program?The IMF has sought multiple conditions, including increased taxes, Central Bank's "independence," and "controlling" public expenditure. The Central Bank will now work as a direct agency of the IMF and raise interest rates independently of the government in Colombo, and the Wickremesinghe government will also increase fuel, electricity, and cooking gas taxes and cut subsidies on social programs. In mid-March, thousands of workers went on strike to protest against the tax hikes as a precondition for the IMF bailout. The government recently introduced income taxes for professionals, ranging from 12.5% to more than 36%.Commenting on that, Sultana said this is the 17th time since Sri Lanka has gone to the IMF, and on nine occasions, they got full funding: "research shows on all these occasions, two-three years after 100 % of the funds had been disbursed or program was over, the economy of Sri Lanka declined."On several occasions, critics said that in the name of structural reform, the IMF took away the austerity measure."Social packages and subsidies are crucial for developing countries," Tandon stressed. "Some of these measures are key to restoring economic stability. However, the austerity measures need to be weighed especially given the rising energy prices. The sudden consolidation must not marginalize the affected population."Tandon feels that the situation is going to worsen for a few countries as all countries are expected to follow the "package of policy change" not fixed in "a local context". "The pace at which the reforms are introduced also tends to make matters worse where countries are expected to follow a package" of policy changes that are not always rooted in a local context. A combination of these two is observed in the cases of Pakistan and Latin America," Tandon observed.While Sri Lanka's Gov't Celebrates, Economists SulkSoon after the loan was approved in some parts of Colombo, government supporters celebrated with sweets, crackers, and fireworks. While the approval has brought positivity for many, economists are eyeing on long-term prospects and how the country would deal with its twin fiscal and trade deficits."The fund facility will signal to creditors that there is financial support as well as potential economic reforms that can send the country into path-correction. However, only time will tell if these have been effective. It is also important to note that this is a small percentage of its overall debt and domestic reforms can pull Sri Lanka out of the recession in the long run," Tandon added.After IMF bailout, now the country will get support from investors as well as from financial institutes like ADB and others. But to believe that the bailout package is the only solution to its problems, it is not, Sultana said. What Does Sri Lanka's Political System Have to Do With Economy?Last year, a massive protest erupted against the then President Gotabaya Rajapaksa and his family, with citizens demanding democratic reforms and change in governance.In particular, the protest voices called for replacing the old political class with a new "new political culture" through a "system change". As a result of the civil unrest, Wickremesinghe took over as president promising citizens political reforms and better governance. However, soon after he assumed office, Wickremesinghe labelled the activists as "fascists" and "anarchists". He used emergency laws and the draconian Prevention of Terrorism Act to crack down on protest sites and demonstrators.Not just that, the Sri Lankan Parliament continued to be dominated by the Rajapaksa camp. "The ruling alliance is still seen as the Rajapaksa government," Adabala said.With the presidential elections due in September 2024, Sultana said we don't know if the newly elected government will be interested in carrying on with the IMF package."In 2017, when Sri Lanka took an IMF loan, the government changed in 2019 and said that they do not want to take last tranche of the bailout as they're not happy with the taxes imposed under the IMF program," Sultana said. "However, this time situation is different but if the opposition comes to power with a promise to reduce taxes and they have to do it, and then it could be a different story," Adabala added.
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IMF Loan Unlikely to Solve Sri Lanka's Crisis, Say Experts
Deexa Khanduri
Sputnik correspondent
On Monday, the IMF confirmed that cash-strapped Sri Lanka would get the first $330m tranche of a $2.9 billion bailout package in two days.
Hours after International Monetary Fund (IMF) approved the island nation's request for a $2.9 billion bailout, Sri Lankan President Ranil Wickremesinghe said that his country is "no longer deemed bankrupt by the world".
In a video address, Wickremesinghe said that the loan would restore the country's international recognition, revive confidence among foreign investors and help banks regain international recognition.
According to President Wickremesinghe, the program would enable it to access up to $7 billion in overall funding.
Speaking to Sputnik, economic analysts opined that rising debt from foreign banks, including the IMF, may benefit neither the citizens nor the country as this will lead to rising income tax, corporate tax, and son on, adding that the country may endure a long-term recession.
Clouds Hover IMF Loan Rescuing Sri Lanka's Troubled Economy
Dr. Gulbin Sultana, an analyst on Sri Lanka at the Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi, told Sputnik that the IMF loan is going to help the cash-strapped country for a short time as it is facing multiple crises simutaneously.
Sultana, however, said a bailout may not end their problems.
Another expert, Suranjali Tandon, Assistant Professor at Delhi-based National Institute of Public Finance and Policy, sharing his analysis of the loan said: "The fund facility by the IMF is a temporary relief for the country as its public debt levels are approximately 130% of the GDP and a large fraction of these are foreign loans."
According to the World Bank’s figures, by the end of 2022, Sri Lanka had an external debt burden of more than $52 billion, of which about 40% is owed to private creditors and the remaining from bilateral creditors — China (52%), Japan (19%) and India (12%).
What's Wrong With IMF's Austerity Program?
The IMF has sought multiple conditions, including increased taxes, Central Bank's "independence," and "controlling" public expenditure.
The Central Bank will now work as a direct agency of the IMF and raise interest rates independently of the government in Colombo, and the Wickremesinghe government will also increase fuel, electricity, and cooking gas taxes and cut subsidies on social programs.
In mid-March, thousands of workers went on strike to protest against the tax hikes as a precondition for the IMF bailout. The government recently introduced income taxes for professionals, ranging from 12.5% to more than 36%.
Commenting on that, Sultana said this is the 17th time since Sri Lanka has gone to the IMF, and on nine occasions, they got full funding: "research shows on all these occasions, two-three years after 100 % of the funds had been disbursed or program was over, the economy of Sri Lanka declined."
On several occasions, critics said that in the name of structural reform, the IMF took away the austerity measure.
"In 1997 when Asian Financial Crisis hit countries like Indonesia and Malaysia, they sought a loan from IMF. And most of these countries' subsidies that were provided to marginalized people, were eventually taken away," Sultana explained, adding that it led to a rise in poverty.
"Social packages and subsidies are crucial for developing countries," Tandon stressed. "Some of these measures are key to restoring economic stability. However, the austerity measures need to be weighed especially given the rising energy prices. The sudden consolidation must not marginalize the affected population."
Tandon feels that the situation is going to worsen for a few countries as all countries are expected to follow the "package of policy change" not fixed in "a local context".
"The pace at which the reforms are introduced also tends to make matters worse where countries are expected to follow a package" of policy changes that are not always rooted in a local context. A combination of these two is observed in the cases of Pakistan and Latin America," Tandon observed.
While Sri Lanka's Gov't Celebrates, Economists Sulk
Soon after the loan was approved in some parts of Colombo, government supporters celebrated with sweets, crackers, and fireworks.
Government spokesperson Bandula Gunawardena even compared the nation's feelings to the time when the Sri Lankan army won the civil war in 2009: "when the war was over, we felt a certain kind of happiness, and it was a similar feeling," Gunawardena shared happily.
While the approval has brought positivity for many, economists are eyeing on long-term prospects and how the country would deal with its twin fiscal and trade deficits.
"The fund facility will signal to creditors that there is financial support as well as potential economic reforms that can send the country into path-correction. However, only time will tell if these have been effective. It is also important to note that this is a small percentage of its overall debt and domestic reforms can pull Sri Lanka out of the recession in the long run," Tandon added.
After IMF bailout, now the country will get support from investors as well as from financial institutes like ADB and others. But to believe that the bailout package is the only solution to its problems, it is not, Sultana said.
What Does Sri Lanka's Political System Have to Do With Economy?
Last year, a massive protest erupted against the then President Gotabaya Rajapaksa and his family, with citizens demanding democratic reforms and change in governance.
In particular, the protest voices called for replacing the old political class with a new "new political culture" through a "system change".
As a result of the civil unrest, Wickremesinghe took over as president promising citizens political reforms and better governance.
However, soon after he assumed office, Wickremesinghe labelled the activists as "fascists" and "anarchists". He used emergency laws and the draconian Prevention of Terrorism Act to crack down on protest sites and demonstrators.
Not just that, the Sri Lankan Parliament continued to be dominated by the Rajapaksa camp.
Although Wickremesinghe's ruling alliance has managed to get an IMF bailout and tried to win public support, people are angry over high taxes. Opposition parties are supporting protestors, Ramu Adabala, a Colombo-based senior journalist, told Sputnik.
"The ruling alliance is still seen as the Rajapaksa government," Adabala said.
With the presidential elections due in September 2024, Sultana said we don't know if the newly elected government will be interested in carrying on with the IMF package.
"In 2017, when Sri Lanka took an IMF loan, the government changed in 2019 and said that they do not want to take last tranche of the bailout as they're not happy with the taxes imposed under the IMF program," Sultana said.
"However, this time situation is different but if the opposition comes to power with a promise to reduce taxes and they have to do it, and then it could be a different story," Adabala added.
