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Not going to IMF then & going to IMF now : Will Sri Lanka’s Problems be solved?

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God Father

Senior Manager - Equity Analytics
Senior Manager - Equity Analytics

Not going to IMF then & going to IMF now : Will Sri Lanka’s Problems be solved?
Posted on May 14th, 2022

State of Sri Lanka’s Economy – Research Team

Since early 2020, the Gotabaya Rajapaksa government appeared to implement a plan with several components for the external sector. These components included securing of multi-lateral and bi-lateral loans, monetization of selected assets, obtaining Central Bank SWAPs, promoting Hambantota Industrial & Pharmaceutical Zones, Colombo Port City and other FDIs, and increasing non-debt inflows, remittances and exports. That plan did not contemplate an IMF programme. That official government stance was well known and in place until the President announced that he was seeking an IMF programme on 15th March 2022.

It will also be noted that those who were constantly urging the Government to seek an IMF programme, were claiming that Sri Lanka would then be able to access funding of about USD 3,000 million via an IMF programme and other borrowings. 
In that background, it would be helpful to assess what was achieved by the Sri Lankan authorities in the last year through the alternative strategies, without an IMF programme. 

The analysis of publicly available data shows that the Government secured forex cash loans of almost USD 1,300 million from the China Development Bank, while the CBSL obtained a SWAP of USD 1,550 million from the Peoples Bank of China.
The CBSL also secured bridging finance” of over USD 1,500 million from India through the postponement of the Asian Clearing Union (ACU) settlements and a further SWAP of USD 400 million from the Reserve Bank of India. 

In addition, another SWAP from the Bangladesh Bank was obtained for USD 200 million.  All those inflows added up to USD 4,950 million. 
In fact, it was by using these new funds, and the brought forward reserves of the CBSL that the 3 ISBs totalling USD 2,500 million in 2020, 2021 and 2022 plus other maturing debt had been settled, while also providing significant liquidity support of nearly USD 2,000 million to the State Banks, and forex for urgent essential imports of around USD 1,500 million for food, fuel, gas, coal, medicines, etc.

In addition, the Government finalized a trade credit line of USD 1,000 million for oil imports and USD 1,000 million for other essential imports from India and these facilities have already been accessed from late March 2022 onwards. 

Further, based on an appeal from the Sri Lankan President to the Chinese President in January 2022, China had also indicated that it was ready to arrange USD 1,000 million as a liquid finance facility and USD 1,500 million for import financing. In fact, that was officially referred to by China’s Ambassador in Sri Lanka on 17th March 2022 and Sri Lanka’s Ambassador in China on 12th April 2022. On the basis of the above assurances from China and India, further commitments of USD 4,500 million were also assured.  

In addition, it has also been reported at intervals that negotiations with several other Middle Eastern Governments and Central Banks were also on-going and although by the end March 2022, those had not been successful, some of those engagements may still have potential for success in the future.

It may also be noted that the Government’s effort to raise USD 250 million from the partial divestment of West Coast Power, and a further USD 100 million from the partial divestment of the Eastern Terminal of the new Colombo Port, did not bear fruit due to political reasons, although that was also a part of the Government’s plan to raise non-debt inflows. 

It may also be noted that the secondary market for Sri Lankan ISBs was trading at highly elevated levels throughout 2020 and 2021, and it is very unlikely that the Government would have been able to access funds from the international bond markets during that Covid-stricken period, even atexorbitantly high interest rates. Hence, obtaining funds at low single-digit interest rates from bi-lateral sources was the better option, if not the only option, from that point of view as well.

In any event, in the light of the materialised receipts of USD 4,950 million and credible commitments of USD 4,500 million, the decision taken by the Government to pursue its stated path could be justified, since the option of bilateral support and other declared strategies was a lot less controversial and risky than pursuing a tough IMF programme that could have been quite painful to the people (high taxes and interest rates, depreciated currency, sale of national assets, etc) and long-drawn out. 

In fact, the situation would have been grave from about a year ago, if the aforementioned forex inflows had not been arranged by the authorities and the commitments not obtained, whilst only relying on a possible IMF programme, which could have been delayed or dragged on for whatever reason, even if the IMF had been approached an year earlier.

It must also not be forgotten that it was during the period 2015-2019, while following an IMF programme, that the then Government issued an additional net USD 10,000 million of ISBs which could be termed the origin of the current external debt problem. 

As a direct consequence, the Government’s external debt shot up by 65% and forex debt servicing tripled, while the GDP was almost stagnant at around the USD 80 to 84 billion levels. 

Sri Lanka’s external debt problem was further aggravated from 2020 onwards, by about USD 4.5 billion of the country’s annual forex inflows suddenly drying up due to the collapse in tourism, and about USD 1.5 billion reducing in 2021, due to the Hawala proliferation affecting Workers remittances. 

In any event, it must be clearly understood that seeking a programme with the IMF is a decision to be taken by the Cabinet of Ministers, and not by officials. If the Cabinet had taken a policy decision one year or even two years ago to approach the IMF and informed the country of the Government’s intention to do so, the entire governmental machinery including the CBSL and MOF would have complied with that decision. In fact, that happened on 15th March 2022, when the President made the official announcement that the Government would seek an IMF programme. 

Unfortunately, the true situation has been misinterpreted, which explains why the blame is being pinned on the former Governors of the Central Bank, former Secretary to the President, and former Secretary to the Treasury as being responsible” for Sri Lanka not embarking on an IMF programme. They seem to have forgotten that such a decision should have been taken by the Cabinet of Ministers, and not by officials. 

In any event, even at this stage, it may be useful for those persons to familiarize themselves with case studies of past IMF programmes” in similar circumstances in other countries, as well as understand the repercussions of sovereign debt default”. They should probably do that before hailing a possible “IMF programme” and the sovereign debt default” as Sri Lanka’s new panacea for all ills. 

It may still be possible that those steps which are today being hailed, may be the very cause of a very serious, irretrievable and unmanageable economic and social outcome that may haunt Sri Lanka for a long time to come.

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