Sri Lankan finance minister, Ali Sabry, who was appointed by President Gotabaya Rajapaksa after sacking brother and former finance minister Basil Rajapaksa on April 4, was in Washington last week to hold talks with IMF and World Bank for an urgent financial bail-out for the country. The island nation of 22 million people is battling an extremely tough time with food inflation in March rising to 29.5% and forex reserves dipping to $1.6 billion while it needs over $7 billion this year to service the $51 billion external loan. It has already intimated to the lenders that the country will default on the payments due from April 12 until an IMF bailout package is available.

Indian Finance Minister Nirmala Sitharaman who was also in Washington last week and met IMF top brass said that India will fully support Sri Lanka in its deliberations with IMF for a speedy bailout under IMF’s Extended Fund Facility (EEF), which is meant to help member countries address medium and long term balance of payment problems.

Sri Lanka has requested a package under IMF’s Rapid Financing Instrument (RFI) which is meant to address the urgent balance of payment crisis. In a press release, Sri Lanka’s finance ministry has said that IMF executives have confirmed that India has also made representation on behalf of Sri Lanka for relief under RFI.

However, China has expressed unhappiness over Sri Lanka talking with IMF for a bailout package. According to a Bloomberg report, China’s envoy to Sri Lanka Qi Zhenhong told reporters in Colombo on Monday said that the move would impact the credit talks currently going on between the two countries. “Sri Lanka going to IMF with a short notice has unavoidably impacted the discussion,” he said.

Meanwhile, at the IMF headquarters in Washington, Pakistan’s newly appointed finance minister Miftah Ismail was also lobbying for an IMF relief package last week. Its case was slightly different but the financial condition of the country with 220 million people, 10 times larger than Sri Lanka, is no different. In contrast to Sri Lanka’s $1.6 billion in foreign exchange reserves, Pakistan has about $10.7 billion.

Pakistan had signed for an IMF loan of $6 billion in 2019. It was to be disbursed in instalments over 39 months, subject to satisfactory periodic reviews. The country has so far received $3billion. The new instalment of the loan was dependent on the approval of the seventh review which could not be held because of the recent political turmoil in the country. As per reports, IMF has accepted Pakistan’s request to increase the loan amount to $8 billion and extend the loan period by one year.

But IMF has asked Pakistan to withdraw fuel and electricity subsidies that the embattled former Prime Minister Imran Khan had approved in February. Pakistan’s consumer inflation in March rose to 12.7% and IMF while the annual growth rate predicted by IMF is 4%. In these circumstances when prices are high and growth is sluggish, it will be extremely tough for a government to remove subsidies on essential items such as fuel and electricity. Doing so will further increase the cost of other essential goods including food items.

The same applies to Sri Lanka whose condition is all the more precarious. However, the good thing with Sri Lanka is that India has been helping the island nation, with India’s support amounting to $2.5 billion in the first three months of 2022.

Both Sri Lanka and Pakistan are heavily import-dependent economies. The worsening balance of payments crisis can create a shortage of essential items as is being seen in Sri Lanka where from fuel to food, everything has disappeared from the markets.

People must understand that populist economic policies do not help anyone. While the citizens may think that subsidies are making their lives easier, it’s only a short-term result. The future of these decisions is always going to be tough. The Rajapaksas have treated the country’s economy extremely casually on the one hand and increased government jobs to keep themselves popular. This policy has resulted in a whopping $51 billion external loan which becomes too heavy to service in a tourism-dependent economy hit by Covid-19.

Pakistan again is a country whose state spending is extremely high with over $11 billion in the defense budget. The general environment in the county is far from business-conducive. The IMF bailout for both can at best be a short-term solution. To come out of the current economic mess on a sound footing, both countries need to embrace prudent economic policies that may seem tough and painful for some time. (IPA Service)