The BGA Sri Lanka team led by Senior Advisor Chullanté Jayasuriya, wrote an update to clients on the announcement of an IMF bailout for the country. 

Context

  • The International Monetary Fund (IMF) on March 20 approved a US$2.9 billion extended fund facility (EFF, commonly referred to as a bailout) for Sri Lanka. The announcement came after nearly a year of negotiations precipitated by the island nation’s rapid economic collapse and subsequent political turmoil.
  • In addition to the money directly linked to the EFF, the country hopes to unlock up to another US$7 billion through other sources such as the World Bank and Asian Development Bank.

Significance

  • The IMF EFF, which will take place over the next four years, will require Sri Lanka to make significant reforms to most aspects of its ailing economy. To meet the demands of the IMF, Sri Lanka will have to scale back its bloated government, better regulate all its state-owned enterprises while privatizing many of them (most visibly the perennially troubled SriLankan Airlines) and rein-in populist spending and tax policies.
  • Upcoming local elections will test the government’s popularity and preview whether there is sufficient political appetite to see the reforms through. Though elections in April will have no direct effect on the government’s strong parliamentary majority, protests against the reforms already undertaken raise the risk that the government will see a sharp rebuke for its attempts to right the economic ship.

Implications

  • While the news is overwhelmingly a positive development for Sri Lanka, companies should be realistic in expecting a long road until the economy returns to a semblance of normalcy. The IMF bailout is the start of fiscal consolidation, not the end point.
  • The IMF’s forecasts reveal that the fund anticipates the economy to largely stabilized by 2025. The fund’s projections have inflation returning to its base rate of 5 percent, from its current annualized rate of 50 percent, and economic growth to hit 3 percent within two years.

We will continue to keep you updated on developments in Sri Lanka as they occur. If you have any questions or comments, please contact BGA Sri Lanka Senior Advisor Chullanté Jayasuriya at cjayasuriya@bowergroupasia.com.

A small ginko leaf

Senior Advisor

Chullanté‘s command of economic, political and social trends in Sri Lanka makes him a unique leader with a broad and deep network throughout the country. He has over 30 years of experience in trade and investment promotion, private sector development, policy planning implementation, management of chambers of commerce and international development cooperation. Chullanté previously served as the International Trade Centre’s national consultant to the National Export Strategy of Sri Lanka and as Sri Lanka senior technical advisor for local economic governance at The Asia Foundation. He is a United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) ... Read More