Imagine a situation without the IMF

Sri Lanka’s rupee, in a surprising turn, turned from Asia’s worst performing currency to Asia’s best performing currency within a day. Bloomberg which identified Sri Lanka’s rupee as Asia’s worst preforming currency on May 21 reported on May 24 that it has become Asia’s best on May 22, strengthening as much as 2.7%, its biggest gain since March 2023, reversing losses from the previous day when it slid to a three-year low.

The Central Bank of Sri Lanka (CBSL) data showed the extent of the panic that gripped Sri Lanka’s foreign exchange market last week, with the rupee’s year-to-date (YTD) depreciation against the US dollar accelerating sharply within days as importers rushed to secure dollars while exporters delayed conversions. 

The primary drivers of the rupee’s recent depreciation are the ongoing Middle East conflict and the resultant sharp spikes in global oil and shipping costs. Central Bank asserts that the current currency pressures stem from these external shocks.  This cannot be compared with the 2022 economic crisis which could have been averted with structural adjustments. 

Friday’s strengthening of the rupee was attributed by Deputy Minister of Finance and Planning Dr. Anil Jayantha Fernando to some market players deciding to sell dollars before upcoming inflows from the International Monetary Fund (IMF) and Asian Development Bank. However, the possibility of the IMF allowing Sri Lanka to draw the 6th and 7th installments under its USD 2.9 billion Extended Fund Facility (EFF) programme for the country was not announced suddenly last week. It was in the public domain for some time.

The International Monetary Fund (IMF) has scheduled an Executive Board meeting on May 27 to review and potentially approve the combined fifth and sixth reviews of Sri Lanka’s EFF programme. If approved, this decision will unlock roughly USD 700 million in financing. Prospects of Sri Lanka receiving these two installments would undoubtedly have impacted the market as happened in January, 2023. But last week’s sudden jump of Sri Lankan currency is worth studying.   

A similar appreciation of rupee was evident three years ago, on February 28, 2023,  while the country was reeling from an unprecedented economic crisis and it continued thereafter for several weeks, resulting in the reduction of prices of some food items. This appreciation of the Rupee was witnessed a day after the International Finance Corporation (IFC) offered to pump into the country US$ 400 million while the assurances of the IMF Executive Board approving the USD 2.9 billion Extended Fund Facility (EFF) programme in the near future were forthcoming. 

And the trend continued following China, which had then been dragging its feet for the previous six months over supporting Sri Lanka’s debt structuring programme,  confirming its assistance on March 5 --  and on the same day,  IMF Managing Director Kristalina Georgieva announcing that the Executive Board of the IMF will decide on Sri Lanka’s EFF at its meeting on March 20.

These incidents indicate how heavily Sri Lanka’s economy is dependent on external factors and how vulnerable it is during geo-political turbulences in various parts of the world, especially in the Middle East. The IMF would not be here for ever to bailout the country. On the other hand, it is a lending agency, not a charity. We have to repay tomorrow what they offer us today. 

No country is immune to external factors, but efforts must be taken to minimise the effects of those outside shocks. The remedial measures have been discussed here for years without any tangible steps were taken. Past governments pushed the country more towards this trap, by destroying existing local industries rather than modernising them. The leaders of the ruling National People’s Power (NPP), prior to them being shot to power, have been vexing eloquent on diversifying  and transforming the country’s economy into a production-based economy. There is no doubt that no party can bring in such transformations within a short period, yet, signs must be evident that the country is moving towards that end. 

‘Your Thought’ is a space, a right of the readers to support or contradict and discuss the issues highlighted in the editorial and other articles in the editorial and op-ed pages. Designed as the reader’s editorial; our readers can send in their writings, with a word count not exceeding 200, to ‘Your Thought’, Daily Mirror Political Features Desk, No 8, Hunupitiya Cross Road, Colombo 2 or email to [email protected]