Introduction and Historical Background

 

Part 1: Introduction and Historical Background

Introduction and Historical Background

1.1 Introduction

Sri Lanka is an island nation located in the heart of the Indian Ocean. Its history, culture and economic development are filled with various challenges and successes. In the past few years, Sri Lanka has faced a major economic crisis. This crisis has not only affected the livelihood of the country’s people but also its international credibility.

 

In this situation, the International Monetary Fund (IMF) stepped in to help Sri Lanka. The IMF Extended Fund Facility (EFF) program was created to restore Sri Lanka’s economy, ensure debt sustainability and lay the foundation for long-term growth. The program has brought about various changes in Sri Lanka’s political, social and economic systems.

 

1.2 Sri Lanka’s Economic History and Crisis

1.2.1 (1970-2000): Open Economic Policies and Growth

 

In 1977, Sri Lanka adopted open economic policies. This led to an increase in foreign investment, exports and private sector growth. However, economic growth was hampered by the civil war (1983-2009). During this period, the government mostly spent on defense spending. Spent too much.

 

 

 

1.2.2 (2009-2019): Growth after the end of the war

After the end of the civil war in 2009, the Sri Lankan economy returned to growth. The tourism, construction and service sectors flourished. However, this growth was largely dependent on debt and short-term external financing.

 

 

1.2.3 (2019-2022): Economic Crisis

In 2019, the new government implemented tax cuts and increased government spending. This led to a decline in government revenue and a widening budget deficit. In 2020, the COVID-19 pandemic affected the global economy. Sri Lanka's tourism and remittance income declined. This led to a decline in foreign exchange reserves, leaving it unable to finance even the import of essential goods.

 

In 2022, Sri Lanka defaulted on its foreign debt for the first time in its history. The crisis led to political upheaval, popular protests, and social unrest.

 

 

1.3 IMF Arrival and EFF Program

To overcome this crisis, the Sri Lankan government sought assistance from the International Monetary Fund (IMF). After months of negotiations, in March 2023, the IMF agreed to provide Sri Lanka with $3 billion (SDR 2.286 billion) in financial assistance under the EFF program. The program is based on debt restructuring, budget consolidation, monetary consolidation, and structural reforms.

 

1.4 Consequences of Sri Lanka's Economic Crisis

·       Inflation: Inflation rose above 50% in 2022, which greatly affected the livelihood of the people.

·       Low foreign exchange reserves: Without funds for imports, there was a shortage of essential goods.

·       Social unrest: The economic crisis led to popular protests and political changes.

·       Debt default: In 2022, Sri Lanka defaulted on its debt for the first time in international history.

 

Part 2: Structure and Objectives of the IMF EFF Program

2.1 Basics of the IMF Extended Fund Facility (EFF) program

·       The IMF Extended Fund Facility (EFF) is a program that provides long-term financial assistance to countries suffering from structural economic problems. It provides financial support to countries as they undertake economic reforms and help them restore stability.

 

 

Key features of the EFF program:

 

·       Long-term assistance: Typically lasts 3-4 years.

·       Restrictions: Countries must implement planned reforms to receive financial assistance.

·         Economic reforms: Includes budget consolidation, monetary policy changes, structural changes, etc.

2.2 Details of the EFF Programme for Sri Lanka

·       Funding Amount: SDR 2.286 billion (approximately $3 billion).

·       Duration: 48 months (4 years).

·       Phases: The programme is divided into several phases, with funding being provided after each phase has seen the Government of Sri Lanka undertake specific reforms.

 

 

2.3 Main Objectives of the EFF Program

2.3.1 Restoring Economic Stability

• Controlling Inflation.

• Determining the Exchange Rate on a Market Basis.

• Rebuilding Foreign Exchange Reserves.

 

2.3.2 Ensuring debt sustainability

• Complete debt restructuring and reduce the debt burden.

• Bring public debt below 95% of GDP by 2032.

 

2.3.3 Budget consolidation

• Increase revenue and control expenditure.

• Target primary maximum of 2.3% of GDP by 2025.

 

2.3.4 Social protection

• Expand programs that provide protection to low-income people.

• Maintain social peace.

 

2.3.5 Good Governance and Transparency

• Improve transparency and public trust in government financial management.

• Strengthen anti-corruption measures.

2.4 Implementation of the EFF in Sri Lanka

2.4.1 Structural reforms

• Improving tax collection capacity.

• Privatizing or restructuring state-owned enterprises.

• Cost-cutting measures.

 

2.4.2 Monetary Adjustments

• Control inflation by raising interest rates.

• Market-based exchange rate fixing.

 

2.4.3 Debt Restructuring

·       Negotiate with bilateral and private creditors and change the debt repayment schedule.

 

2.4.4 Social Protection

• Direct cash assistance to affected people.

• Securing the costs of essential services such as food and medicine.

 

2.5 Key Contributions of the IMF Program to Sri Lanka

1. Fiscal Support: Helps address the country’s fiscal deficit.

2. Debt Sustainability: Reduces the debt burden and ensures the country’s fiscal sustainability.

3. Economic Reforms: Promotes fiscal, monetary, and structural reforms.

4. Social Protection: Reduces social vulnerabilities and protects affected populations.

5. Promoting Good Governance: Enhances government transparency and public credibility.

 

 

Part 3: Progress in Implementation and Social Impacts of the IMF EFF Program

 

3.1 Progress in Fiscal and Economic Adjustments

 

3.1.1 Budgetary Adjustment and Tax Reforms

 

Under the IMF program, the Government of Sri Lanka rolled back the tax cuts introduced in 2019. Mainly:

1. Income tax rates were increased: Higher income tax rates were reintroduced in an effort to increase revenue.

2. Value Added Tax (VAT) was increased from 8% to 15%, which significantly improved government revenue.

3. Tax base broadening: Tax exemptions and concessions were reduced, and efforts were made to collect more taxes.

These measures helped increase government revenue and reduce the budget deficit. The primary objective of the IMF program is to achieve a primary maximum of 2.3% of GDP by 2025.

3.1.2 Expenditure Control and Subsidies

• Subsidies in the energy and agricultural sectors were reduced.

• Government employee salaries and pensions were re-evaluated.

• Social security spending was preserved without cuts, as it was important to help the affected people.

 

3.1.3 Monetary Policy Changes

1. The central bank has tried to control inflation by raising interest rates.

2. Inflation was over 50% in 2022; it has come down to single digits in 2025.

3. The exchange rate is determined on a market basis, which helps improve foreign exchange reserves.

 

3.1.4 Debt restructuring efforts

• Negotiations are underway with bilateral creditors.

• Efforts have been made to restructure ISB loans with private creditors.

• The target is to bring public debt below 95% of GDP by 2032.

 

3.2 Social Impacts and Protection

3.2.1 Social Protection Programs

Under the IMF program, the Government of Sri Lanka has expanded direct cash transfer programs to low-income people. Through this:

1. Food and medical services are available to low-income people.

2. Social protection expenditures are protected in the budget.

 

 

 

3.2.2 Social Reactions

• As subsidies were reduced, public protests and protests broke out in some areas.

• Tax hikes and price hikes increased the cost of living for the public.

• The government has made efforts to maintain balance.

 

3.3 Good Governance and Transparency

• Anti-corruption laws have been strictly enforced.

• Transparency and accounting practices in public financial management have improved.

• The credibility of the government and the confidence of international investors have increased.

 

3.4 Challenges

·       Debt restructuring negotiations are not yet complete.

·       Social protests and political instability are delaying reforms.

·       There is a risk that the global economic environment and price shocks will have a negative impact again.

 

Part 4: Comprehensive Challenges of the IMF Program and Sri Lanka’s Future Development Path

 

4.1 Challenges in the Implementation of the IMF Program

4.1.1 Issues in Debt Restructuring

Sri Lanka’s debt restructuring is a major challenge. The reasons for this are:

1. Differences among bilateral creditors: Major bilateral creditors such as China, India, and Japan have their own debt restructuring rules, making it difficult to obtain cooperation at the same time.

2. Negotiation difficulties with private creditors: There are many ISB creditors, and restructuring agreements with them is complicated.

3. Delays in changing the debt repayment schedule: This is an obstacle to restoring the country’s fiscal sustainability.

 

4.1.2 Political and social challenges

1. Lack of political stability: Political changes and changes in government affect the implementation of the program.

2. Social opposition: Measures such as subsidy cuts and tax increases create public opposition.

3. Protests and riots: Protests and social unrest have occurred in some areas, making economic recovery difficult.

4.1.3 Global Economic Environment

- Global economic slowdown: If the global economy slows down, Sri Lanka’s exports and foreign exchange earnings will be affected.

- Rising energy and food prices: This will increase Sri Lanka’s import costs.

- Economic status of major trading countries: If the economic growth of countries like China and India slows down, Sri Lanka will be affected in the future.

 

4.2 Sri Lanka’s future growth path

4.2.1 Changes in economic sectors

·       Tourism sector recovery: The tourism sector has started to grow again after COVID-19. This will increase foreign exchange earnings.

·       Export sector development: Steps are being taken to increase exports in the agriculture, industry and service sectors.

·       Technology and innovation sectors: There is potential for growth in information technology and innovation-based sectors.

 

4.2.2 Social and Human Resource Development

1. Education and Health: Protect social security spending and improve education and health services.

2. Labor Skill Development: Create training and job opportunities that enhance the skills of workers.

Introduction and Historical Background