Prospects of receiving the IMF’s Extended Finance Facility to revive and reform economy

The prospect of receiving the Extended Finance Facility (EFF) of US$ 2.9 billion from the International Monetary Fund (IMF) is receding.

Unlikely

The hopes and expectations of receiving the Extended Finance Facility (EFF) of US$ 2.9 billion from the IMF in December or January is unlikely. Even obtaining it in March next year is doubtful as it is dependent on demonstrating the country’s foreign debt sustainability by restructuring the foreign debt of about US$ 51 billion.

Vital

This credit line is vital to revive and reform the economy. President Ranil Wickremesinghe’s hopes of achieving a high growth trajectory of seven to eight percent is dependent on obtaining this line of credit and undertaking a wide range of economic reforms.

IMF facility

The Government has placed much reliance on the IMF credit facility to implement its economic reforms to usher in its programme of economic recovery and high growth. Regrettably, the IMF’s approval of the Extended Finance Facility (EFF) is being delayed owing to our inability to demonstrate our external debt sustainability. Owing to this limitation, we may not be able to obtain the EFF even by March next year.

Hurdle

China that holds about US$ 5.1 billion or about ten percent of the country’s debt is unwilling to restructure her debt. It is however willing to give further assistance and loans.

China’s rationale

The prospect of the People’s Republic of China agreeing to a restructuring of its debt is unlikely. The Chinese government has said it is opposed to restructuring its debt, but is willing to give a fresh loan.

The rationale for this is that there is a great deal of debt owed by many less developed countries to China, and if they were to agree to a restructuring of the Sri Lankan debt, they would be obliged to restructure the debt to other countries as well.

Alternate solution

It appears that we would have to find a way out of this situation. No doubt the experts are trying to find an innovative way out of this dilemma. However, it is unlikely that China would agree to a restructuring of its debt to Sri Lanka.

Geopolitics

The complexity of the issue lies in the interplay of geopolitics. The Chinese would not want Sri Lanka to be dependent on the IMF and follow its policies. Therefore they are likely to block Sri Lanka obtaining an IMF facility. On the other hand, China's geopolitical strategy would be to enhance Sri Lanka's dependence on China. Their alternate suggestion may be a bailout package with Chinese financial and commodity assistance.

MR’s Support

Such a programme would have the support of a large and influential component of the Government. This was implied by Sri Lanka Podujana Peramuna (SLPP) Leader Mahinda Rajapaksa’s Budget speech, where he opposed the privatisation of State enterprises, a key policy of President Ranil Wickremesinghe. It is also well-known that the Rajapaksas are opposed to an IMF programme.

Alternate sources

In this context of uncertainty and for this reason, President Wickremesinghe is seeking finances from other sources such as the World Bank, the Asian Development Bank (ADB) and Japan. These are not large amounts, but useful in the current crisis of external finances.

Uncertain

Indications are that such assistance, especially as project loans, would be forthcoming only after the approval of the IMF credit line that is in turn dependent on foreign debt sustainability.

Conference in Egypt

President Ranil Wickremesinghe’s participation at the COP27 Sharm El-Sheikh climate conference in Egypt, was probably due to the hidden agenda of obtaining financial assistance for the economy. This was from the agreement to create a Loss and Damage Fund (LDF) to compensate developing countries for damages suffered from climate change. The attempt to obtain US$ one billion for environmental improvement from COPTA was another attempt to replenish external reserves.

Summing up

It is clear that China in its refusal to agree to restructure its debt, is a severe stumbling block to the country obtaining an EFF facility from the IMF. President Wickremesinghe’s strategy of achieving a high economic growth through economic reforms cannot be achieved without IMF assistance.

Concluding reflections

The Government’s expectation of reviving the economy and achieving seven to eight percent growth was based on obtaining US$ 2.9 billion from the IMF and undertaking a wide range of economic reforms. The inability to demonstrate foreign debt sustainability has diminished the likelihood of obtaining this facility.

How can the issue of ensuring foreign debt sustainability be resolved? Will there be a way out or an alternate strategy? Is there a prospect of key members of the IMF granting the facility owing to their disagreement with China? Sri Lanka is at a cross road. The political and economic future is uncertain.