Bailout of Sri Lanka by the IMF

Bailout of Sri Lanka by the IMF

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March 28, 2023

Amid its worst financial crisis, Sri Lanka recently guaranteed itself a $3 billion bailout package through the International Monetary Fund (IMF).

Understanding IMF

• Establishment – The IMF was set up in 1944 and, as a consequence of The Great Depression.

• Objective – To ensure worldwide economic co-ordination and avoid devaluation of currency by nations that try to improve their exports.

• Membership – There are 190 member countries within the IMF.

• Headquarters – Washington DC, United States of America.

• The organization ensures worldwide financial stability through Financial Assistance, Capacity Development and Policy Advice.

• Role – It provides fiscal support to nations that are in crises so that growth and economic stability can be restored.

• The organization does not provide loan for particular projects.

• Resources of IMF – The sources of IMF funds are Multilateral borrowing agreements, Bilateral borrowing agreements and through Member quotas.

Understanding IMF Bailout

• Bailout – Means providing help to an entity that is facing bankruptcy threat.

• Reasons for Bailout – Nations need IMF bailout due to various reasons such as:

a) To mitigate currency crises

b) To purchase essential imports

c) To deal with macroeconomic risks

d) To bolster the exchange value of currency

e) To solve external debt commitments

• Conditions – Nations are required to fulfil the following conditions to secure an IMF bailout:

a) Structural amendments like tax reforms, fiscal transparency, etc.

b) Amendments in macroeconomic determinants such as credit and monetary aggregates.

c) Amendments in external borrowing and fiscal balances.

d) Amendments in state-owned organizations.

e) Amendments in international reserves.

India and the IMF

• India has been a founder member of the organization

• Since 1993, the country has not requested for any financial help from the IMF.

• India has repaid all its loans taken from the IMF in May 2000.

• The Finance Minister of India is the ex-officio Governor on the IMF Board of Governors

• An Alternate ex-officio Governor is the RBI Governor.

• In the IMF, the current quota of India is SDR (Special Drawing Rights) 5,821.5 million thus translating into the 13th biggest quota holding nation within IMF and with 2.44% shareholdings.

• In the IMF, India has put in SDR 750 million by way of nine note purchase agreements.

e) To solve external debt commitments

Source - The Indian Express