Crisis after Crisis

Sri Lanka is currently engaged in the intricate task of debt restructuring, a process that is exacerbated by tensions among its diverse array of creditors.

By Daniyal Talat | November 2023

The economy of Sri Lanka has been suffering from a severe crisis characterized by declining foreign reserves, a default on foreign debt, and several other issues. One of the most difficult economic crises in the nation’s history has led to massive demonstrations and shortages of necessities like petrol and medicine. The government of Sri Lanka has asked the IMF for assistance to help stabilize the country’s economy. They came to terms with the IMF in March for a $3 billion credit program intended to alleviate the economic crisis. Nevertheless, recent events indicate that the initiative has run into trouble.

An international financial organization called the IMF offers financial support to nations with economic problems. It accomplishes this by providing financing and advice on economic changes and policies. In Sri Lanka, the IMF consented to give the nation financial assistance to help it deal with its economic difficulties. Several agreements and reviews govern how the IMF functions. In the financing procedure of the IMF, this phase is crucial. Before the IMF can give money to a nation, it must come to a “staff-level agreement” with that nation’s government over a set of economic policies and reforms. Recently, a two-week IMF mission traveled to Sri Lanka to evaluate the status of the economic reforms outlined in the financing package.

However, the tour ended without obtaining the essential staff-level consent needed to release the $333 million next tranche of money. The IMF voiced worries about Sri Lanka’s capacity to enhance tax and revenue collection, although acknowledging the country’s remarkable progress in implementing economic reforms. This is important because maintaining a sustainable level of debt and providing essential public services depend on effective tax collection.

Sri Lanka would suffer a lot if a deal with the IMF could not be reached. The country’s recovery from its current economic crisis might be slowed considerably by the delay in disbursing the next batch of money. Since the beginning of the crisis, Sri Lanka has been the first country in the Asia-Pacific region to default on its foreign debt in more than 20 years. A steep decline in foreign reserves catalyzed the default. The 22 million people who reside in Sri Lanka are suffering greatly due to the economic upheaval, which has caused widespread demonstrations and shortages of essential supplies like gasoline and medicine.

Sri Lanka is restructuring both its domestic and foreign debt in addition to the credit arrangement with the IMF. This is another essential part of the nation’s attempts to deal with its economic problems. Sri Lanka’s domestic and international debt totaled over $42 billion by the end of 2022. To make the debt more bearable for the nation, debt restructuring entails negotiating new conditions, either extending the duration of the loan or modifying interest rates. Tensions between several creditors may make this procedure even more difficult.

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