Sri Lanka’s IMF Agreement Will Not Alter the Trajectory of a Collapsing Economy
Ahilan Kadirgamar, Devaka Gunawardena and Sinthuja Sritharan
Without a major course correction in its economic trajectory and a significant “haircut” on its external debt, the country will likely be knocking on the door for another IMF pact. It could face another default in a few years.
The International Monetary Fund (IMF) executive board’s approval of loans is being celebrated in the elite quarters of Sri Lanka. The IMF’s recommendations have been implemented for close to a year, however, they have exacerbated the island nation’s economic depression.
The reality is that the IMF agreement and the limited funds that will be released in instalments will not alter the trajectory of a collapsing economy.
Given Sri Lanka’s default on its external debt in April 2022, the debt restructuring process, which is aimed at reducing its unsustainable debt levels, is likely to drag on for months, if not years.
Indeed, without a major course correction in Sri Lanka’s economic trajectory and a significant “haircut” – reduction of outstanding interest payments or a portion of a bond payable that will not be repaid – on its external debt, it will likely be knocking on the door for another IMF agreement. It could face another default in a few years.
The agreement is based on the same assumptions and projections rooted in the free market regime. But Sri Lanka’s challenge is not to return to the deep waters of a turbulent global economy. Instead, the country must identify avenues to increase domestic production of essential goods which its people need for survival. This includes strengthening the food system through local agricultural production.
Sri Lanka may find itself drowning in the dead weight of external debt if the process of achieving debt sustainability is predicated on integrating back into the global economy through more loans and hypothetical opportunities in the distant export markets.
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