The International Finance Corporation (IFC), the investment arm of the World Bank, has announced that it will provide Sri Lanka with a $400 million cross-currency swap facility to assist in funding essential imports.
The IFC announced in a statement in February that three private banks would receive the facility to finance approximately 30% of imports, including fertilizers, food, and medicine.
Sri Lanka is currently going through its worst financial crisis in more than seven decades, which is being exacerbated by a severe lack of dollars. The funds will provide the country with a much-needed cushion in terms of foreign exchange.
According to the data from the World Bank, the economy of Sri Lanka is expected to shrink by 9.2% in 2022 and by 4.2% in 2023.
According to Joon Young Park, Portfolio Manager of the Financial Institution Group for South Asia at the IFC, “We expect this financing to boost confidence in the investor community and attract fresh capital inflow to support the Sri Lankan economy.”
IFC is also working on additional strategies to provide client banks with additional long-term funding and advisory services in the future, according to the statement.
In September of last year, Sri Lanka and the International Monetary Fund (IMF) reached a preliminary agreement for a $2.9 billion bailout. However, before the funds can be distributed, the country needs to put its debt on a sustainable repayment path.
The condition of this Island started in April 2022, when the former president of Sri Lanka, Gotabaya Rajapaksa’s government declared sovereign default. Rajapaksa resigned in July of last year after fleeing to Singapore during the heaviest economic protests.
Many people believe that Rajapaksa is to blame for sending the country into its worst economic crisis since independence, which resulted in severe shortages of food, medicine, and fuel.
Even though it’s easy to point the finger at one person, Sri Lanka’s economic crisis and sovereign default were caused by fiscal indifference that had been going on for a long time, weak institutions, a lack of transparency and accountability, and short-sighted economic policies that were thought to be popular with politicians.
Sri Lanka had a per capita income of $464 in 1990, making it a low-income nation. It had advanced to a middle-income nation with a per capita income of $814 seven years later. In 2018, its GDP per capita increased to USD 4,060.
As a result, in 2019, the World Bank ranked Sri Lanka as a country with upper-middle income. However, as GDP per capita increased, the tax ratio decreased, necessitating substantial borrowing by the government to close the fiscal deficit.
Sri Lanka ran out of foreign currency by 2022 to pay back loans from other countries.
Sri Lanka now faces a difficult road ahead and must rectify the majority of these policy errors. Inflation has skyrocketed as a result of rising fuel and electricity costs, taxes, interest rates, and the exchange rate. It was 53.2 percent in January.
This indicates that the middle class and business community of the nation are struggling as a result of the government’s inability to subsidize them.
The nation has been wracked by additional protests and strikes against tax reforms and other policy reforms, nearly a year after protests against the Rajapaksa government.
It is compelled to implement reforms to conclude debt restructuring progress and receive support from the IMF and other multilateral organizations.
Sri Lanka demonstrates that for many low-income nations, middle-income transitions sound and look fancy.
