IMF Approves $3 Billion Bailout for Sri Lanka's Crisis-Hit Economy

The International Monetary Fund (IMF) has approved a $3 billion bailout for Sri Lanka's struggling economy, which has been facing its worst financial crisis in decades. The decision will allow the country to restructure its debt and pave the way for economic improvement in 2024. The immediate disbursement of a $333 million loan over four years will help address "macroeconomic stabilization" and restore debt sustainability in the short term, according to Krishna Srinivasan, the director of the IMF's Asia and Pacific department.

Sri Lanka's economy has contracted sharply due to pre-existing vulnerabilities, policy missteps, and shocks, resulting in unsustainable debt levels and elevated inflation. The country has been grappling with severe shortages of food, medicine, fuel, and electricity since last year, which have led to angry protests and political turmoil. The previous President, Gotabaya Rajapaksa, was forced to flee the country, and in July 2022, lawmakers chose six-time Prime Minister Ranil Wickremesinghe as his successor.

The IMF's loan approval is significant for Sri Lanka, which defaulted on its debt last year. It aims to mitigate the impact of the crisis on the poor and vulnerable, safeguard national stability, and strengthen governance to improve the country's growth potential in the longer term. While adherence to the program will point a way out of a partly self-induced crisis, it often comes at the cost of painful austerity, according to Gabriel Sterne, head of global emerging markets at Oxford Economics.

However, analysts have also argued that Sri Lanka needs institutional reforms to achieve long-term debt sustainability. Ambitious revenue-based fiscal consolidation is necessary for restoring fiscal and debt sustainability. Poor governance and the lack of incentive to pursue responsible policies remain a concern going forward, Sterne said.

Despite the challenges, Sri Lanka has committed to its reform agenda and considers the IMF program critical to achieving its vision, Wickremesinghe said in a tweet thanking the IMF. Sri Lanka's economy is expected to contract around 8% in 2022 and 3% this year before picking up next year, according to Srinivasan.

The IMF's decision to approve the bailout is a positive development for Sri Lanka,as it will provide much-needed financial support to help stabilize the country's economy and alleviate some of the immediate hardships faced by the population. However, the country will still face significant challenges in achieving long-term debt sustainability and economic growth.

The IMF's loan approval comes with conditions that require Sri Lanka to implement fiscal consolidation measures, including reducing government spending and increasing revenue generation through tax reforms. These measures may be difficult to implement, especially given the country's political instability and social unrest.

Furthermore, institutional reforms are necessary to address the underlying issues contributing to Sri Lanka's financial crisis, such as poor governance and a lack of responsible policies. Without these reforms, Sri Lanka may struggle to achieve sustained economic growth and long-term debt sustainability.

While the IMF's bailout is a positive step for Sri Lanka, the country still has a long road ahead in its economic recovery. The success of the IMF program will depend on the government's ability to implement the necessary reforms and address the structural issues that have contributed to the country's financial crisis.