Sri Lanka has asked for advice from the International Monetary Fund amid a worsening economic crisis, the finance minister said on Wednesday, signalling Colombo could seek an international bailout.
The island’s tourism sector and worker remittances, the government’s main sources of income, have been battered by the pandemic.
Colombo imposed a broad import ban to try to save foreign currency, and the island nation of 22 million has since seen shortages of food and fuel as well as electricity rationing.
Rating agencies warn it might not be able to make payments on its $35 billion foreign debt.
Finance Minister Basil Rajapaksa said Colombo wrote to the IMF seeking technical support to manage the economic crisis.
An IMF team will arrive in Sri Lanka “in the next few days and advise us on how to deal with the situation”, Rajapaksa said at a public ceremony in the capital.
“I can’t say whether we will accept their advice or not, but they will tell us what we don’t know,” he added. And he signalled that the government could seek a bailout from the Washington-based institution.
Local and international financial experts have called for the Sri Lankan government to do so – a move that could force it to undertake painful reforms.
“We need to find out what their conditions are,” said Rajapaksa, the younger brother of President Gotabaya Rajapaksa. “Even when we try to get a housing loan, we first find out the conditions of the bank.”
The Sri Lankan cabinet is divided on going to the IMF, while the central bank is opposed to getting IMF aid, saying its conditions may be more painful for the struggling economy.
The bank has said that the IMF could demand a sharp depreciation of the local currency that could raise domestic prices. Inflation is already high and hit a record 14.2% last month with food inflation reaching 25%.
Financial analysts believe that under any IMF programme Colombo will have to make painful adjustments and raise interest rates and taxes, while cutting government spending.
Sri Lanka’s foreign reserves were at $7.5 billion when Rajapaksa came to power in November 2019 and dropped to $3.1 billion by the end of 2021 despite a two-year ban on a wide range of imports.
Hard pressed for dollars to import fuel, Sri Lanka on Wednesday secured a $500 million credit line from New Delhi to import urgently needed oil from India.
Sri Lanka has also asked Beijing for more loans to repay already existing Chinese loans which account for over 10% of the island’s official external debt.
- AFP, with additional editing by George Russell