Banking on IMF bailout

All indications are that the executive board of the International Monetary Fund will sign off tomorrow on the $2.9 billion bailout package its staff worked out with Sri Lanka in September. President Ranil Wickremesinghe can no doubt claim credit for clinching a deal on which work began at the height of the island’s economic crisis.

Ministers and government politicians are already trumpeting the impending success. They see it as a way out of the unprecedented financial crisis precipitated by their own SLPP administration. There is no argument that the country was pushed into bankruptcy following the foolish tax and agricultural policies of Gotabaya Rajapaksa who, together with the country, paid a high price for his folly.

With all that murky water under the Kelani bridge, the real question is whether nine tranches of $300 million spread over 48 months can revive Sri Lanka’s economy and deliver the reliefs promised by Ranil Wickremesinghe.

No sooner the Executive board signs off on the bail out, the IMF is likely to release its first tranche. That may appear like loose change in the scheme of international finance – the bailout of Credit Suisse last week was reportedly $53.7 billion, about two thirds of Sri Lanka’s GDP.

Media Minister Bandula Gunawardana is on record saying that it is not the amount of the bailout, but the signal that Sri Lanka’s economy is now under IMF supervision that will give confidence to lenders and potential investors. Some of the currently frozen bilateral funding, especially from Japan, could be made available, but will any private capital rush in where prudent investors fear to tread? Will creditors who bought into Sri Lanka’s oft repeated boast that it had never defaulted on its foreign obligations think of putting their money in Sri Lanka after the unprecedented sovereign default of April 2022? At the time, Sri Lanka’s external debt was $46 billion according to revised government figures.

The IMF deal was based on the strict understanding that Sri Lanka’s creditors agree to restructure the debt in such a way it will fit into the “Debt Substantiability Analysis” carried out by the Washington-based lender of last resort. What does this really mean? How much of a haircut will bilateral lenders agree to? Will the private creditors, also known as the International Sovereign Bond (ISB) holders, agree to the same terms? Out of Sri Lanka’s foreign debt, more than 50 percent is owned by private creditors.

It is common knowledge by now that getting the IMF bailout was held up for months mainly because of a delay in securing “financial assurances” from China which accounts for 52 percent of Sri Lanka’s bilateral credit. Whether one likes it or not, China can still make or break the deal.

Those who believe in a quick recovery after the expected good news from the IMF tomorrow would do well to realize that it’s a long way to Tipperary. The “financial assurances” must now be negotiated, and actual numbers established. How much Sri Lanka can pay back in the next four years? President Wickremesinghe in his candid statement to parliament on March 7 made it clear that Sri Lanka on its own does not have the capacity to payback 6.0 to 7.0 billion dollars annually till the end of 2029.

As a leader with little or no political base, except the fickle support of the SLPP, can Wickremesinghe steer the course? Sri Lanka has had 16 programs (aka bailouts) from the IMF since 1965. Sri Lanka’s track record with the Fund is not inspiring. Apart from being a repeat offender, Sri Lanka has completed only nine out of the 16 programs. In the early days, not drawing down the funds allocated to the island could have been taken as a good sign – an indication that the country was able to get out of the woods even ahead of schedule.

But the last program in 2016 clearly underlined the policy instability that has plagued the country. The program was almost on track when Gotabaya Rajapaksa jettisoned the IMF without completing it. Gotabaya Rajapaksa can also take credit for pushing the country to the abyss by spurning the concessionary credit of Japan and scuttling the multi-billion-dollar Light Rail Transit (LRT) project. A minimum $1.5 billion investment he spurned with another $480 million grant from the Millennium Challenge Corporation (MCC) of the United States.

By the end of next year, Sri Lanka will have to face a presidential election and the outcome of that will decide if the country has the courage to keep up the reforms. Even before that, trade union pressure will test the government’s resolve to remain with the IMF deal. Wickremesinghe can also call a parliamentary election anytime of his choosing if he wants to test the public mood which doesn’t appear to favour him or his governing partner the SLPP.

Austerity is never popular but demonstrating that the rulers are also leading frugal lifestyles is necessary to win public confidence. This is woefully lacking. Those who think that an IMF bailout alone will be a quick fix to all Sri Lanka’s economic woes must think again.