#AskWatchdog - 08

#AskWatchdog - 08

Research by Umesh Moramudali Edited by Aisha Nazim Translated by Nishadi Gunatilake & Kesavan Selvarajah

@September 28, 2022

Read this article in English | සිංහල | தமிழ்

You asked:

Now that Sri Lanka reached staff-level agreement with the IMF, are we getting any money?

Our Answer:

No. Sri Lanka has  to wait till the IMF Executive Board approves Sri Lanka’s request to receive money.

On 01 September, the Sri Lankan government and the IMF announced that the government reached a Staff-Level Agreement with IMF staff on an Extended Fund Facility (EFF) arrangement with Sri Lanka. Under the EFF arrangement, the IMF intends to provide about 2.9 billion U.S. dollars to Sri Lanka. This money will  be provided only after the IMF Executive Board approves the agreement.  The funds will be disbursed in installments with the first installment provided immediately after the IMF Executive Board approves the program. It is not quite clear at the moment how long it will take for the IMF Executive Board to approve the agreement and thereby release the money. This will depend on number of factors including the willingness expressed by different creditors of Sri Lanka to provide debt relief, called “financing assurances”. The IMF Executive Board will carefully analyze Sri Lanka’s progress with economic reforms, particularly the prior actions under the Staff-Level Agreement, as well as with the debt restructuring negotiations before deciding whether to approve the agreement. The IMF-supported program officially commences when the Board approves the agreement.

Reaching a Staff-Level Agreement means that the IMF staff believes the Sri Lankan government has shown sufficient intent to carry out economic reforms and presented a comprehensive plan to do so. In the eyes of IMF staff, reforms presented in the plan will be sufficient to achieve macroeconomic stability and strong, inclusive growth and to make the country’s debt level sustainable in the medium term, provided Sri Lanka’s creditors grant adequate debt relief. The Staff-Level Agreement largely focuses on Sri Lankan government’s commitments and the targets it has set regarding economic reforms, inflation, reserve accumulation, budget deficit and debt levels. 

The agreed program also includes a set of debt sustainability targets that Sri Lanka must meet through its own fiscal effort and debt relief. The debt targets require reducing the debt burden through debt restructuring and are essential to showing that Sri Lanka can achieve debt sustainability in the medium term. In order to reduce the debt repayment burden, Sri Lanka’s creditors need to agree to write off a part of the outstanding debt, reduce interest payments or to extend the payback period for loans obtained. These are usually identified as the ways in which debt relief is provided. Without creditors agreeing to provide sufficient debt relief through one or a combination of these methods, debt sustainability cannot be achieved. Therefore, IMF Board will not disburse the money without Sri Lanka’s creditors agreeing to provide debt relief — aka restructure debt.

How long will it take to get creditors to come to a consensus to restructure debt? We really don’t know; it could take up to 03 months - 01 year, or maybe even more. For instance, in Zambia, it took over a year since defaulting. As a result of that, it took almost 09 months for Zambia to obtain IMF Executive Board approval for the staff-level agreement reached in 2021 December. This received Executive Board approval on 31 August. This was largely because Zambia’s creditors reached an agreement only on 30 July.

What are the recent import restrictions, and how will these affect me?

Our answer:

During last month, the government imposed several import restrictions to reduce foreign currency from going out of the country.

On 22 August, the Finance Ministry issued a gazette banning the imports of over 300 items from 23 August. This included several food items, cosmetics, electrical equipment, and even some raw materials: causing many businesses to oppose this move as they said it will adversely affect their operations.

In response to this criticism, the Finance Ministry issued another gazette lifting the import ban imposed on 159 items; such as as the import ban on laptops, computer equipment, sewing machines, refrigerators, and tiles, for example.

This gazette also allowed to import of other banned items for specific purposes with the approval of the Import Export Controller. While import restrictions on a number of items were removed through the gazette issued on 09 September, the government banned the importation of ceramic bathware such as sinks and squatting pans.

As of now, approximately 150 items are banned from imports, including snacks like yogurt and chocolate, some construction material including bathroom items and accessories, cosmetics and perfumes, IT equipment, and electronic items. What does this mean then?

When goods are banned from importing, it creates a shortage of goods available to buy. This resulted in an increase of prices of already imported items as well as close substitutes to items that are banned from importation. For instance, imported perfumes, cosmetics, clothes, and accessories will have extremely limited supply, resulting in even higher price increases of those items.

This works differently for intermediate goods or capital goods since such items are used in a production process. For instance, import bans on construction goods will not only increase cost of construction exponentially but also will put some construction work on halt.

Furthermore, while the importation of some machinery and raw materials is still banned, they can be brought into the country upon the recommendation by the Secretary to the Ministry of Industries. This will complicate and delay importing necessary machinery and raw materials, resulting in delays in manufacturing.

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