BAILOUT PACKAGE OFFERED TO SRI LANKA

• Recently, The International Monetary Fund (IMF) approved a preliminary agreement with Sri Lanka on a four-year, USD 2.9 billion bailout package which is aimed at restoring economic stability and debt sustainability for the crisis-ridden south Asian nation.
• The Easter bomb blasts of April 2019 in churches in Colombo
• The government policy of lower tax rates and wide-ranging subsidies for farmers during their campaign.
• The Covid-19 pandemic in 2020 which impacted exports of tea, rubber, spices, garments and the tourism sector.
• The IMF package is to be paid in tranches over the next four years, which is less than what India provided to Sri Lanka over four months.
• The package must be approved by the IMF’s board of directors.
• The approval is contingent on Sri Lanka’s international creditors – commercial lenders such as banks and asset managers, multilateral agencies, as well as bilateral creditors including China, Japan, and India agreeing to restructure its debt.

Benefits:

• It can boost the receiving country’s credit ratings, and the confidence of international creditors and investors who may then chip in to provide bridge financing to close the gaps between the tranches.
• Its program will aim to boost government revenue, encourage fiscal consolidation, introduce new pricing for fuel and electricity, hike social spending, bolster central bank autonomy, and rebuild depleted foreign reserves.
• The programme aims to reach a primary surplus of 2.3% of GDP by 2024.

Measures are Taken by Sri Lanka’s Economy to Improve its Economy

• The country’s budget aimed at increasing revenue to 15% of GDP by 2025 from 8.2% at the end of 2021 by reducing public debt.
• An increase in VAT from 12 to 15%, and compulsory tax registration for everyone aged 18 years and older in order to widen personal income tax collections are among the measures.
• Some 50 state-owned enterprises are up for privatisation.

International Monetary Fund (IMF)

• The International Monetary Fund (IMF) is an international organization that promotes global economic growth and financial stability, encourages international trade, and reduces poverty.
• When a country borrows from the IMF, its government agrees to adjust its economic policies to overcome the problems that led it to seek financial aid.
• These policy adjustments are conditions for IMF loans and serve to ensure that the country will be able to repay the IMF.
• This system of conditionality is designed to promote national ownership of strong and effective policies.
• Conditionality helps countries solve balance-of-payments problems without resorting to measures that are harmful to national or international prosperity.

SOURCE: THE HINDU,THE ECONOMIC TIMES,MINT