Political organization

IMF visits Sri Lanka amid worst economic crisis in decades – The Organization for World Peace

On Monday, June 20, a nine-member team from the IMF arrived in Colombo, the Sri Lankan capital, to start bailout talks with Prime Minister Ranil Wickremesinghe. The island nation of 22 million people hopes to receive up to $3 billion from the International Monetary Fund to get its public finances back on track and access bridge financing. The visit comes as the Sri Lankan cabinet passed an amendment to curtail presidential powers, which it hopes will satisfy growing numbers of protesters demanding the resignation of President Gotabaya Rajapaksa. These protesters say Rajapaksa’s mismanagement of the economy is to blame for the current economic crisis, which is the worst the country has seen since its independence seven decades ago. As foreign exchange reserves reach record highs, the lack of foreign currency has blocked imports of essentials such as fuel, food and medicine.

On the day the IMF arrived, Energy and Power Minister Kanchana Wijesekera told Reuters there were only 12,300 tons of gasoline and 40,000 tons of diesel left in the country. According to a former energy minister, Sri Lanka’s daily diesel consumption in February was around 40,000 tonnes, showing just how low these fuel levels are. “This visit from the IMF is very important…For many international bondholders, this will be a key requirement to ensure that they come to the table and talk about debt restructuring in the first place,” Lutz Roehmeyer, portfolio manager at Berlin-based bondholder Capitulum Asset. The management, explained to Reuters. Prime Minister Wickremesinghe agreed, saying earlier this month that an IMF program was crucial to access bridge financing from sources such as the World Bank and the Asian Development Bank.

But Wickremesinghe and many others have been waiting much longer than this month for the IMF to get involved. Throughout the economic crisis, assistance from the IMF and other global actors has been consistently cited as a key part of any solution to Sri Lanka’s financial difficulties. The slow response is largely due to the government’s and central bank’s refusal to seek IMF assistance for months. This expectation will make it even more difficult for the national economy to recover. While Sri Lanka hopes the IMF will offer a fast track to recovery – its aim is to reach a preliminary agreement by the end of the visit on June 30 – any significant relief is likely to take several months. Although this visit may represent the beginning of a solution, the government must make additional efforts to ensure its success.

The amendment recently passed by the Sri Lankan cabinet, which aims to limit presidential powers, will hopefully be another part of this solution, if approved by the Parliament with a two-thirds majority. The proposed 21st Amendment seeks to reverse the changes made by the 20th Amendment, which gave President Rajapaksa sweeping powers when he passed it in October 2020. This amendment allowed the president to hold ministries, appoint or fire ministers, and made the president the appointing authority for elections, the civil service, the police, human rights, and commissions of inquiry into bribery or corruption. The 21st Amendment would return some of those powers to parliament and restore the independence of important commissions, providing a long-awaited restoration of power to the democratic processes that Rajapaksa sought to eliminate.

Between the IMF visit and the 21st Amendment, Sri Lanka is potentially on the verge of a major economic and political recovery. If the nation receives a large enough IMF loan, other foreign actors will be more likely to get involved in much-needed long-term economic development. However, the IMF loan alone is not enough. The government will need to continue its efforts to revive the economy in a way that will both help Sri Lankans in the short term (address the fuel shortage) and prepare the economy for productivity in the long term (make the foreign exchange reserve stronger than before). This is, of course, easier said than done, but if power is restored to Parliament via the 21st Amendment, the government will be better equipped to ensure success. But first, everything depends on the visit of the IMF and the vote of amendment of the Parliament; the outcome of these two events will determine how long this crisis lasts.