The International Monetary Fund (IMF) on Tuesday reached a $2.9 billion deal with Sri Lankan officials aimed at bolstering the island country's battered economy.
Sri Lanka's economy has been hit by a slew of woes including a paucity foreign exchange, high inflation, ballooning public debt, a worthless currency and a shortage of essentials.
The deal includes Sri Lanka requesting access to around 2.2 billion in special drawing rights (SDR), which is equivalent to $2.9 billion.
The SDR is not a currency, but rather the unit of account of the IMF, which is, in turn, linked to a basket of currencies. An SDR is a potential claim to the currency available to member of the IMF and can be exchanged for them.
This agreement is a staff-level agreement and would still need the approval of the IMF's Executive Board based on the findings of this mission.
An IMF mission went to Colombo in as part of a series meetings by both sides. They met the President and Finance Minister Ranil Wickramsinghe, Governor P. Nandalal Weerasingh of Sri Lanka's central bank, and several members of Sri Lanka's private sector and civil society, following which this measure was announced.
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*Terms and conditions apply
The deal has been signed under the Emergency Extended Fund (EEF), which is an IMF program to assist the countries most in need of a helping hand with longer repayment tenures, but is aimed at correcting structural weaknesses and calls for deep reform. Such reform is often painful for the borrower according to conditions spelt out by the IMF.
While the IMF has pointed out that such difficulty is crucial for long term stability, a study showed that it may be to little effect. Between 2011 to 2013, 20 out of the 22 countries who had opted for an IMF borrowing program were found to be repeat borrowers.
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is for 48 months, and carries with it several conditions for reform.
For starters, the program agreed to with Sri Lanka aims to make several economic metrics market-determined. This includes reforms to energy pricing, foreign exchange and a data-driven and a stronger, more autonomous central bank.
Next, it also calls for Sri Lankan legislative reform, naming specifically a new Central Bank Act and a new Banking Act for a stronger financial system.
Majorly, the program also aims to implement major tax reforms. This includes personal income tax being more progressive (where the rich pay higher levels of tax), along with a broader tax base (implying more citizens and entities will be taxed) by including a greater base within corporate tax and value-added tax. By 2024, the program aims to reach a primary surplus of 2.3% of GDP.
(A primary surplus is an indicator of how well a government can work its way out of debt. It is the fiscal deficit (or surplus) of the government but whose calculation does not include what the government spends on interest payments. If a government is running a primary surplus, it is considered to be able to, at the very least, make timely interest payments.)
Finally, the IMF calls for qualitative reform, especially in reducing corruption by enhancing public transparently and public fund management and a stronger anti-corruption framework.
Sri Lanka went into economic dire straits earlier this year, started by its inability to service mounting external debts due to a dearth of tourism by the COVID-19 pandemic and the 2019 Easter bombing, an old-age economy and populist government schemes.
The IMF's program can be read here.
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