The ongoing economic crisis in Sri Lanka has led to countrywide political protests against the Gotabaya Rajapaksa administration. The country has approached the International Monetary Fund (IMF) for a bailout package. In this regard, the Sri Lankan delegation led by newly appointed Finance Minister Ali Sabry had “fruitful technical discussions” with the IMF. Nevertheless, the finalization of a bailout package and release of funds from the IMF is preconditioned to how effectively Sri Lanka can negotiate with its creditors to get into a debt restructuring programme and how efficiently it can bring fiscal, institutional and tax reforms.

The Finance Minister of Sri Lanka is hopeful and confident that a productive agreement could be achieved with the creditors and thus be able to fulfil the IMF conditions of making the debt sustainable. Meanwhile a large section of Sri Lankans have welcomed the government’s decision to approach the IMF for assistance; there also exists an opposition against the decision within the country.

Sri Lanka has been availing IMF assistance since 1965. The last such assistance was received in June 2016 in the form of an Extended Fund Facility (EFF) for three years by the then National Unity Government. The Gotabaya Administration after assuming power in 2019 did not draw the last tranche of the EFF (US$200 million). The IMF assistance was abandoned in 2019 by the government as the conditionalities attached to the package were contradicting the populist measures pledged by Gotabaya Rajapaksa during the Presidential elections campaign. The Rajapaksa Government as well as the Central Bank of Sri Lanka made previous governments’ neoliberal economic policies responsible for the country’s poor economic growth and balance of payment crisis. Therefore, the government adopted an alternative homegrown economic policy and the Central bank was tasked to formulate a fiscal and debt management policy accordingly.

As the economic situation started worsening with the sharp decline of foreign reserves since 2021, experts and some of the opposition political leaders had been repeatedly urging the government to approach the IMF. The government, on the advice of the Central Bank, has ignored such call as IMF conditionalities were considered incompatible with the homegrown economic policy until the country got entangled into a political crisis following the resignation of the entire cabinet except for the Prime Minister on 3 April amidst countrywide popular protests against the economic crisis.

IMF generally provides financial support to countries hit by crises to create breathing room to implement adjustment policies to restore economic stability and growth. It is believed that the IMF financing facilitates a more gradual and carefully considered adjustment. Following the unilateral decision to default on the foreign debt amounting to US$ 50 billion by the Sri Lankan Government, the country has completely lost investors’ confidence. Since the IMF financing is accompanied by a set of corrective fiscal policy actions, it is expected that an IMF package will restore investors’ confidence that appropriate policy measures are being implemented to bring reforms and make the debt sustainable. That is why it is considered by many as one of the best options for Sri Lanka at this moment even though there is strong opposition against the IMF.

During the ongoing negotiation with the IMF, Sri Lanka is looking for EFF programme. It has also requested for Rapid Financing Instrument (RFI). Reportedly, India also made representations on behalf of Sri Lanka for an RFI. If the assistance is extended under RFI, Sri Lanka can use the IMF resources with no or limited conditionality. Sri Lanka, according to the IMF, is not eligible for the RFI. Nevertheless, there is an expectation that the IMF might consider the special request.

For assistance under other instruments, IMF has asked for debt sustainability and has specifically asked to achieve an effective agreement with the creditors on debt restructuring. Sri Lanka has been asked specifically to negotiate with China on debt restructuring as it is the largest bilateral creditor. The government is also having technical discussions with the IMF staff members on reforms in fiscal policy and tax regime.

It is certain that if a deal is finalised, the common people in Sri Lanka will have to bear more economic burden as the government will be asked to reduce spending, increase fuel prices and impose taxes along with several other conditions. It is noteworthy to mention here that even though the government avoided seeking an IMF package until now, it did adopt some of the usual policy prescriptions of the IMF such as increasing fuel prices as the economy worsened. In other words, people had to go through more or less the same economic burden they would have otherwise gone through with the IMF assistance. An early decision on approaching the IMF along with a decision of restructuring the debt servicing, however, might have helped the Sri Lankan Government to avoid the political crisis it is facing now.

Even though many in Sri Lanka breathe a sigh of relief at the government’s decision to approach the IMF, the negotiation itself does not imply immediate disbursement of the financial support. Successful negotiation and finalization of the deal will take another five to six months. In the meantime, Sri Lanka would require bridge financing of around US$ 3-4 billion, for which Sri Lanka is looking toward the bilateral partners and the World Bank. Sri Lanka also needs to ensure that revenue earning sectors of the economy are revived at the level of pre-pandemic period.

The current Finance Minister of Sri Lanka has adopted a three-pronged approach to the ongoing economic crisis: (a) getting an IMF programme going; (b) securing bridge financing; and (c) getting Sri Lanka back on a growth trajectory in a year or so. The government however has to overcome several challenges to successfully execute the three-pronged strategies. Though the negotiations on the IMF began and countries like India are also requesting the IMF for assistance to Sri Lanka, the IMF bailout package depends on the fulfilment of the conditions imposed on Sri Lanka.

Despite the optimism of the Sri Lankan foreign minister, there is uncertainty involved with the IMF package. Meeting IMF conditions particularly the successful negotiation with China on debt restructuring will be a challenge for Sri Lanka. Bridge financing is basically for short period and comes in the form of loans. Reviving back the Sri Lankan economy on a growth trajectory also depends on how quickly the revenue earning sectors resurrect. Prolonged political chaos will further reduce the chances of economic revival.

It seems the Sri Lankan government cannot rely only on three-pronged approaches in only one sector, rather it must adopt multi-pronged approaches as corrective policy measures in the arena of economics, politics and foreign policy alongside the negotiation with the IMF.

Dr. Gulbin Sultana is an Associate Fellow at the Manohar Parrikar Institute for Defence Studies and Analyses (MP-IDSA). Views expressed are of the author and not of the Government of India or MP-IDSA.