Sri Lanka reaches out to IMF for help amidst rising national debt

The International Monitory Fund (IMF) emblem. [Courtesty of IMF]

The Sri Lankan government has turned to International Monitory Fund IMF for financial support as it desperately tries to salvage a beleaguered economy that is currently reeling under a severe foreign exchange crisis.

Early this week, Sri Lanka’s Finance Minister Basil Rajapaksa gave the nod to seek assistance from IMF as it softened its resistance against the international lender.

“The Cabinet approval has been given to the Finance Minister to go ahead and discuss with the IMF”, Cabinet spokesman Ramesh Pathirana told Financial Express.

Sri Lanka is currently reeling under a severe foreign exchange crisis with falling reserves and the government is unable to foot the bill for essential imports.

The IMF had early earlier this month, called for urgent reforms in the island nation that is facing the worst economic crisis. According to IMF, Sri Lanka’s economy has been facing “mounting challenges” with public debt reaching “unsustainable levels”.

“On the eve of the pandemic, the country was highly vulnerable to external shocks owing to inadequate external buffers and high risks to public debt sustainability, exacerbated by the Easter Sunday terrorist attacks in 2019 and major policy changes including large tax cuts at late 2019,” the IMF said in a release after global lender’s executive board’s consultative meeting held on February 25.

On Monday, the IMF head of Asia Pacific Changyong Rhee met Rajapaksa to discuss the finer aspects of the package.

Pathirana said technical assistance would be sought from the IMF.

Early this week, the country’s Finance Minister departed to New Delhi to sign a fresh USD 1 billion dollars (Sh100 billion) bailout package with India. The credit line is expected to fund the country’s fuel, food and medicine imports, the finance ministry said.

Last month, Sri Lanka purchased 40,000 metric tons of diesel and petrol from India’s Oil Corporation to meet the urgent energy requirements in the economic crisis worsened by depleted foreign reserves.

India had also announced a USD 900 million loan to Sri Lanka to build up its depleted foreign reserves and for food imports, amid a shortage of almost all essential commodities in the country.

Sri Lanka’s worsening foreign-exchange shortage has seriously impacted the energy sector, which depends entirely on imports for its oil needs. The fuel shortage has led to long queues at understocked pumps across the country.

Sri Lanka’s economy is also seeing a scarcity of food and other essentials, which has pushed inflation to a record 25 per cent last month.

Tourism, another key foreign-exchange earner, has also witnessed a lull due to the pandemic.