IMF’s technical assistance alone isn't enough
While discussing technical assistance with the International Monetary Fund (IMF) will not help Sri Lanka to come out of its crippling debt crisis, initiating these discussions in itself is a positive signal that the country is taking this crisis seriously, analysts say.
Of the two different programmes the donor agency extends - Technical assistance and funding - Sri Lanka has opted for the former.
Former Deputy Governor of the Central Bank, Dr. W. A. Wijewardena told the Business Times that if the country opts for IMF funding, it will help to build investor confidence In Sri Lanka.
He added that floating the rupee should be accompanied by seeking IMF support, restoring the tax system that prevailed before 2019, increase in interest rates, and introducing economy-wide reforms. He said shortterm funding lines from neighbouring countries and nations in the region are not sustainable solutions.
The country is expected to start formal negotiations with the IMF in April on a possible programme that could boost reserves and put growth on a sustainable path.
Economists predicted the exchange rate will hit close to Rs. 400 in coming months. “This is a market correction. It was triggered due to the Easter Sunday attacks in 2019, followed by the pandemic and the stresses from the global economy. It exacerbated with the Russia Ukraine war,” an economist said.
A second economist pointed out that not taking the right decision at the correct time gave rise to this situation. Correct advice was not given on the country’s debt reforms, debt position, exchange rate, and interest rates, he added.
Facing the people and admitting that there is an economic crisis that has imposed hardships on the nation and its citizens was a positive step, said veteran banker, R. Theagarajah.
"After numerous appeals by economic think tanks, business chambers, and other stakeholders, a clear statement ( by the President) was made regarding engaging the IMF after weighing various pros and cons. This is another positive step in the right direction," he told the Business Times.
However, these steps will have to be accompanied by several more steps to develop and roll out a debt restructuring plan with the advice of competent and experienced sovereign debt financial advisor(s) to sit across the table with various groups of creditors and re-negotiate repayment terms, he added. "It has also got to be accompanied by developing and rolling out an economic revival plan which has to address some key policy decisions regarding improved revenue collection, restrained expenditure spending and tariff re-assessment necessary to facilitate international trade which will systematically reduce our trade deficit while also give confidence to the foreign workers to resume routing remittances through formal banking channels."
The path ahead is not a smooth easy one- it requires political consensus and ‘buy in’ by all parties to make it work over a medium-term, he pointed out.
"Time will tell whether this government will have the ability to unite its citizens and place their faith in such a revival plan."