implication of IMF reorms global analysis

Analysis

1. Implication of IMF to Reform the economy

2. Introduction The International Monetary Fund (IMF) works to achieve sustainable growth and prosperity for all of its 190 member countries It does so by supporting economic policies that promote financial stability and monetary cooperation, which are essential to increase productivity, job creation, and economic well-being The IMF is governed by and accountable to its member countries  Fund can flexibly support Low Income Countries (LICs’) financing needs during the pandemic and the recovery while continuing to provide concessional loans at zero interest rates

3. The IMF has three critical missions: furthering international monetary cooperation encouraging the expansion of trade and economic growth discouraging policies that would harm prosperity POLICY ADVICE Monitoring economic and financial developments and advising countries Financial Assistance Loans and other financial aid to member countries Capacity Development Technical assistance and training

4. IMF loans have helped many countries avoid liquidity crisis, such as Mexico in 1982 and more recently, Greece and Cyprus have received IMF loans In Asian Financial Crisis in 1997, many countries such as Indonesia, Malaysia and Thailand were required by IMF to pursue tight monetary policy Sri Lanka (Ceylon) - August 29, 1950 got the membership  

5. Reason for Economic crisis Economic mismanagement by successive governments that created and sustained a twin deficit – a budget shortfall alongside a current account deficit L ucrative tourism industry and foreign workers’ remittances sapped by the pandemic A devastating civil war in 2009, only to be rocked by Easter Sunday church bombings in 2019 Decision to ban all chemical fertilisers in 2021, a move that was later reversed, also hit the country’s farm sector and triggered a drop in the critical rice crop Lack of Foreign Reserves: Sri Lanka “has been running a trade deficit for decades.” This has led to the draining of foreign currency, leaving traders unable to pay for imports

6. Hits to the Tourism Industry Ill-Advised Tax Cuts: In a bid to revitalize the economy, the government cut taxes. However, this had the backfiring effect of greatly impacting government revenue. The action also “prompted rating agencies to downgrade Sri Lanka to near default levels,” which meant the “country lost access to overseas markets.” Russia-Ukraine Conflict: The ongoing conflict between Russia and Ukraine has led to a staggering “price inflation of crude oil, sunflower oil and wheat .” Non profitable investments : air port, harbour Unbearable enlistment of government employees- 1.4 million employees, which resulted in 86% of the government’s tax revenue   A country’s national expenditure exceeds its national income, and that its production of tradable goods and services is inadequate: Tax relaxation for business man, ban on exporting vehicles

7. Effects Being that Sri Lanka highly depends on imports for essential food, fuel and pharmaceutical items, the lack of foreign reserves to pay for import bills means that the supply of such goods has become very limited and highly rationed An endless cycle of waiting in lines for basic goods: Time wasting, Psychological effect to people, Social issues Long hours power cut: further reduce GDP The public anger : demand “government action and accountability” and the resignation India, China IMF assistance and undergoing their condition- bail-out from the –IMF, restructure the debt, austerity measures Political instability: no investors

8. How to over come Many countries like India and Thailand implemented wide-ranging economic reforms after undergoing severe economic crises and came out much stronger . Addressing regressive subsidies Restructuring state-owned enterprises   The country is looking at an IMF bailout, for which it needs to restructure its debt Privatization of unprofitable state own enterprisers Reducing the government work force Making nation policies which can not be reverted back in time to time Cultural predispositions against Foreign Direct Investment Proper tax system Go with the global trend in manufacturing, which is to be part of global supply chains Political stability Promoting export Promoting local products

9. Sri Lanka and IMF When there is budget deficit, IMF is there to help us with conditions As part of the IMF-supported arrangement Sri Lanka has undertaken significant reforms to pave the way out of a deep economic and debt crisis Sri Lanka External Debt reached 52.7 USD bn in Sep 2023 $83 billion in debt — more than half of it to foreign creditors As per the IMF progress on debt restructuring. Continued ownership of reforms is essential to rebuild fiscal credibility and to improve governance and reduce corruption vulnerabilities

10. Sri Lankan authorities formally presented the request treatment in the first meeting of the official bilateral creditors committee, which include India and Paris Club members earlier this month. China, which is the island's largest bilateral lender, participated as an observer   Sri Lanka has so far failed to make enough progress in boosting tax collection and other economic reforms for the International Monetary Fund to release a second tranche of $330 million in the country’s $2.9 billion bailout from bankruptcy However ,concluded the review and approved the release of the second tranche worth $337 million , bringing the value of disbursements to $670 million in the four-year facility

11. Conditions of loans   Reducing government borrowing – Higher taxes and lower spending Higher interest rates to stabilise the currency. Allow failing firms to go bankrupt Structural adjustment. Privatisation, deregulation, reducing corruption and bureaucracy Criticism :  IMF is attempting to pull off a nearly impossible economic feat: perfectly timing and sizing economic intervention on an international scale

12. Sri Lanka’s Structural Reforms 1. Tax Administration The previous government implemented significant tax cuts while simultaneously increasing public expenditure This increased the size of Sri Lanka’s budget deficit and required higher external financing to bridge the gap between revenue and spending However, this increased the debt burden and deteriorated Sri Lanka’s balance of payments position as it continued to service its debt obligations with more debt

13. 2. Public Financial and Expenditure Management Tax administration and public financial and expenditure management overlap significantly with respect to structural reforms The overarching aim of these reforms is that the Government must only spend within its means Public expenditure must align with domestic tax revenues and a sustainable level of foreign borrowing 

14. 3 . The Energy Sector Sri Lanka must diversify its energy sector to ensure that fuel is affordable for citizens and to insulate the economy from the volatility of global energy prices Energy diversification requires significant investments in domestic renewable energy infrastructure to shift the balance towards greater energy autonomy; this will protect Sri Lankan consumers from future commodity price shocks and preserve foreign exchange reserves for other essential imports

15. 4. Anti-Corruption Legislation & Strong Governance The IMF has also called upon the Government to tackle endemic corruption The governance diagnostic mission will guide Sri Lanka to create a more comprehensive anti-corruption agenda and promote government reform that tackles corruption at its core

16. Repercussion Many professionals in Sri Lanka are demanding a reduction in income taxes, and some have left the country over the issue The government has announced policies that effectively: reduce salaries in public service agencies eliminate subsidies increase regressive taxes steps that could degrade public services further raise prices at a time large segment of the population is already struggling due to high inflation Compromise the sovereignty

17. Advantages This time no politically dictates towards the North and East issues in Sri Lanka It focuses on growing revenues and emphasizes tackling corruption and improving social protection, IMF approval of the loan paves the way for multilateral institutions such as the World Bank and Asian Development Bank to offer Sri Lanka new financing, which reach $7 billion over the next four years Currently, the IMF program’s anti-corruption measures are centered on the government passing legislation in line with the United Nations Convention Against Corruption and the IMF carrying out a governance diagnostic that assesses Sri Lanka’s strengths and weaknesses in six areas, including the rule of law and fiscal governance

18. When the crisis began, Sri Lanka had among the world’s lowest tax-to-GDP ratios in the world at 7.3 percent That ratio is expected to nearly double to 14 percent of GDP However, while some of the new measures are designed to increase taxes on the wealthy and eliminate tax exemptions that benefit them, the heavy reliance on value-added taxes can worsen the cost-of-living crisis It also eliminates subsidies for both fuel and electricity and imposes an excise tax on fuel, but does not ensure that these critical measures are carried out in a way that fulfils rather than erodes rights

19. Conclusion The economy is showing tentative signs of stabilization, supported by rapid disinflation and a significant fiscal adjustment. Tax revenues have increased but not as much as initially projected, and reserves accumulation has slowed Sri Lanka is not the only country which took assistance when there is an economic crisis We did not have any other option than go for IMF If IMF loan is not correctly used, Sri Lanka will face worse situation than this Stable government is required to continue its support