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The Sri Lanka government has gone to the IMF for soft loans to help cope with the economic crisis that shows no signs of abating. On April 19, police fired on protesters injuring many and killing one. Prices of essential commodities continue to be high.
While declaring that Sri Lanka will default on its foreign loan repayment schedule, the government has decided to approach the International Monetary Fund (IMF) for a bailout package. But protests demanding the removal of the President and the Prime Minister have only strengthened. University teachers have now joined the protests.
Inmathi.com spoke to Sri Lankan economist and professor at Colombo University, K Amirthalingam about the IMF bailout and other economic aspects.
Has a rationing system been instituted for petrol and other essential commodities?
K Amirthalingam: As such, there is no formal Public Distribution System in Sri Lanka for rationing of petrol and other essential commodities. Because of the severe shortage, limits have been imposed on how much each person can buy. But that has not been implemented properly. There is no government machinery to properly implement the measure.
“The IMF will analyse the economic situation in Sri Lanka and present a report. The IMF will also recommend cutbacks on government expenditure. The government will have to accept these and implement them. Only then will the IMF give loan. But that will take another six months. The government should be able to manage the situation until that time,” says Sri Lankan economist and professor at Colombo University, K Amirthalingam
What will be the impact of the loan default?
Sri Lanka was scheduled to pay $1 billion as principal and interest by July. By the end of this year, Sri Lanka should pay up $7 billion. The total outstanding loan is $51 billion.
The Central Bank has only some $300 million in its kitty. The nation needs $1.2 billion every month to pay just for its import of petrol, fuel, medicines and other essential commodities.
The government has not said it is not going to repay the loan. It has only temporarily halted the payments. The government has promised that it will start repaying the loans from next year with additional interest.
But will that not worsen the debt situation?
It will. The government will have to pay the principal along with additional interest. The government believes things will be back to normal by next year. Only with this belief is the government making such promises.
But the situation is something else. The crisis has worsened. The government has offered to make its loan repayments in Lankan Rupees. Only those who have given loans to Sri Lanka can decide on that.
In a sense the government is not being adversarial, only moderate in its approach to repaying the loans. The government has faith that it will make things better. But protests have strengthened. It seems the chances of the economy rebounding are not high.
What is the position of political parties?
The political parties have jumped into the protests. They are taking out rallies and conducting agitations. They are trying to create an alternative government.
The government has faith that it will make things better. But protests have strengthened. It seems the chances of the economy rebounding are not high.
What is the situation regarding Sri Lanka and IMF?
Talks are ongoing. The finance minister and senior officials are camping in the US. It should be noted that the loans the government takes from India or China may have higher interest but they don’t come with conditions. IMF loans that Sri Lanka wants to take will have lower interest rates but will come attached with conditions.
The IMF will analyse the economic situation in Sri Lanka and present a report. In its report, the IMF will recommend how to increase revenue which will happen mainly through higher taxes nationwide in Sri Lanka. The IMF will also recommend cutbacks on government expenditure.
The government will have to accept these and implement them. Only then will the IMF give loan. But that will take another six months. The government should be able to manage the situation until that time.
Sri Lanka is in turmoil now. If the IMF conditions implemented, prices will rise. People’s expenditure will go up. Therefore their hostility towards the government will only grow. It remains to be seen how the government will handle that anger.
Will Sri Lanka accept the IMF recommendations?
Due to corruption and mismanagement, many firms in Sri Lanka such as the petroleum corporation, airline, power agency are running at big losses. The IMF will insist that these be turned into profit making enterprises. That will be a welcome move but the question is whether the government accept that and do it. If the government does not undertake to do that, then the IMF loan will be in question.
Sri Lanka is in turmoil now. If the IMF conditions implemented, prices will rise. People’s expenditure will go up. Therefore their hostility towards the government will only grow. It remains to be seen how the government will handle that anger.
Has the government done anything on its own in terms of reforms?
The government has introduced some changes in the foreign exchange agency. The dollar has become costlier in local currency. This has increased the dollar exchange rate. Nevertheless this is a welcome move.
In the past, the central bank would buy a US dollar for LKR 193 and sell it at LKR 203. In the open market, the rate went up to LKR 240. For that reason, Lankan Rupee- Dollar transactions largely happened in the hawala market.
The bank has now fixed the exchange rate at LKR 340. This is a big change. Yet, the open market rate is LKR 450.
Another reform is that bank deposit interests have been increased from 7% to 15%. The government believes the people will invest in banks. Loan interest rates have been increased from 9% to 15%. The government believes all these measures will help to solve problems in the economy.
How much does the Sri Lanka government expect as loan from IMF?
The government expects the IMF to give a loan up to $4 billion. But it appears the IMF will give up to $2 billion. It remains to be seen how this will all pan out.
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