🤔 Can IMF Save Sri Lanka?
Sri Lanka is facing its worst economic crisis. Will the IMF be able to bail it out from this situation?
Lights out, surgeries cancelled, fuel unavailable.
That's the reality of Sri Lanka right now.
People in the country cannot even afford a headache right now as there is no medicine available.
The country is staring at the worst economic crisis to hit it in the last 70 years.
Conditions are so bad that the country has said it will be temporarily defaulting on loan payments.
But how did all this happen?
ReadOn!
Domino Effect 🃏
The domino effect that has led to the crash of the Sri Lankan economy began with one government decision in 2019.
The government decided to reduce and even redact several types of taxes as it had promised before coming to power.
The economic logic behind this? People would have more money to spend and would boost Sri Lanka's economy.
And while this may sound good to you, it's not. The move reduced Sri Lanka's income.
The country still could have survived.
But then Covid happened.
You see, Sri Lanka is majorly dependent on tourism. It accounts for 10% of the country's GDP. So, when the pandemic hit, the country's growth slowed down and its economy was impacted. Its forex reserves went down from $7.5 billion in 2019 to $1.93 billion (for comparison, India has forex reserves worth $632.7 billion).
However, demand for foreign reserves was and continues to be high because the nation relies heavily on imports. And so the Sri Lankan currency has fallen in comparison.
Plus, since the country doesn't have enough money to pay off shipments of food and other goods, deliveries are cancelled or delayed. This has caused many items to be short in supply. So inflation has increased from 11.1% in November to 18.7% right now.
And to make matters worse, the country also banned the use of chemical fertilizers last year to promote organic farming and reduce import costs.
Though this seems like a great initiative, it led to crop losses in tea and rubber plantations, reducing the little income the country got from exports. The initiative has since been revoked.
But the damage is done (You can read our entire piece about Sri Lanka's crisis here).
Sri Lanka is now unable to pay back its loans of $51 billion of which $8.6 billion is due this year itself.
The country has decided that it will be using the remaining foreign currency to import necessities for its people, who are currently protesting against the government, calling on the Prime Minister to resign.
So, what will happen to those who have loaned money to the Sri Lankan government? All gone to dust?
No. There is still hope.
Sri Lanka's Options 📜
Sri Lanka has offered the lenders two options:
Option 1: They can capitalise their loan amount. What does this mean?
It means that if Sri Lanka was set to give $1 bn in payments to a lender to pay off a loan worth $10bn, the lender can now add the pending payment amount to the $10bn principle amount and charge interest on the whole amount.
Option 2: Taking repayments in Sri Lankan rupees.
And if creditors don't want to accept either option, there is a third one available.
You see, Sri Lanka is trying to negotiate a loan from the International Monetary Fund (IMF), the messiah of bankrupt countries.
IMF's job is to make sure the global economy continues to function smoothly and so it helps out countries that are drowning in debt by extending loans.
It will probably do the same with Sri Lanka right now.
And when it extends loans, Sri Lanka can sit back with its creditors and restructure the terms of the loans.
But ReadOn, the economic crisis in Sri Lanka has been going on for a long time now. Why did Sri Lanka allow things to get so bad where protestors have to take to the streets? Why not borrow from the IMF sooner?
Well, that's because the loans you get from the IMF come with a lot of terms and conditions.
The IMF will literally tell you how to run your economy before it gives you the money.
And for many countries, the IMF's rules are very limiting. So it generally becomes the last resort.
Sri Lanka borrowed large amounts from China to save itself.
But now it has borrowed so much that the IMF is the only option left.
For instance, when the IMF bailed out India in 1991, we were a closed economy.
So, it set the condition that we would Liberalise our policies and open up our economy so that foreign investments could come in and help us develop.
This condition actually worked out for us and changed our economy forever. Investments came flooding and our GDP grew.
But for most other countries the IMF lays down rules like increasing taxes, reducing minimum wage, cutting public spending and so on.
Its main aim is to reduce a country's spending and make sure it is able to pay back its creditors, including itself.
For many countries these policies have proven disastrous.
For instance, when the IMF asked South Korea to cut public spending in 2001, the country's unemployment rate increased from 3% to 10%.
The same thing happened with Indonesia, which saw its poverty rate increase from 11% to 40%-60%.
Greece has also been suffering ever since it has borrowed from the IMF. Unemployment right now is at 22.5% and minimum wage has gone down.
Sri Lanka itself has had similar problems with IMF bailouts earlier. The country has borrowed from the IMF 16 times till now. The last one was in 2016 and caused the country's economy to nosedive.
So, is taking a loan from the IMF a bad decision?
No, not really. India is a shining examples that IMF's loans can help countries revamp themselves.
But the problem here is that countries come to the IMF when things are already at their worst.
So, it is difficult to determine whether or not the decline that comes after taking a loan from the IMF is the IMF's fault or was an inevitable outcome.
However, Sri Lanka is not just depending on the IMF. It is asking other countries for help, India being one of the main ones.
And we have extended our hand towards our neighbour by offering lines of credit (flexible loans) worth $2.5 billion and a credit line just for fuel purchases worth $500 million.
But will this be enough?
Only time will tell.
In a Line: Sri Lanka is defaulting on its loans and looking to borrow from the IMF once again but this option has proven bad for several countries like South Korea and Greece.
Food for Thought: Is Sri Lanka's current problem a lesson that countries should not import more than they export?
Quick Question: Can Sri Lanka turn its luck around once again?
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The only option left for Sri Lanka's government they have to sell some part of srilanka against the money 💰💸💸