Denying IMF support is no solution for Sri Lanka’s economic woes

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Sri Lanka is currently facing multiple economic challenges amidst the COVID-19 pandemic. The budget deficit, which exceeded 11% of GDP last year due to tax cuts, has aggravated macroeconomic imbalances. Given the revenue constraints, it has become extremely difficult to meet public debt service commitments which absorb as much as 142% of total Government revenue annually. This necessitates further borrowings to roll over the maturing debt.

In the absence of adequate foreign loan inflows, the Government is now compelled to resort to domestic borrowings, mainly bank from the banking sector, causing faster growth of money supply by 22% over the last 12 months.

The resulting increased liquidity exerts considerable demand pressures on imports and inflation, weakening the rupee against foreign currencies. The country’s foreign reserves are down to $ 3.5 billion (excluding gold), as against the foreign debt commitments amounting $ 6.8 billion to be met within the next 12 months.

Presidential Secretary Dr. P.B. Jayasundera in a recent interview categorically stated that the Government has no immediate plan to seek financing from the IMF. He says that an arrangement with the IMF will not help to boost the country’s exports or tourism. Any borrowing, including IMF programme, is good if there are immediate prospects for economic recovery, he says. But if the borrowing programme is not assuring economic recovery, it is important to work out areas where such assurance will come, he insists.

That assurance will come from investment, not from borrowing, according to Dr. Jayasundera.  He further states that a project portfolio around $ 3 billion is available from the World Bank and the Asian Development Bank covering sectors such as water, irrigation, highways, education and health with utilization spanning three to four years. If these projects are fast tracked removing the bottlenecks, the disbursements are a money flow, he said.

State Minister Ajith Nivard Cabraal and Central Bank Governor Prof. W.D. Lakshman too have reiterated in recent forums that the Government has an alternative approach to resolve the current economic problems without resorting to the IMF. However, such alternative approach is yet to be unveiled.



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