The International Monetary Fund (IMF) works to achieve sustainable growth and prosperity for all its 190 member countries. They support economic policies that promote financial stability and monetary cooperation, which are essential to increase productivity, job creation, and economic well-being. IMF has three critical missions: furthering international monetary cooperation, encouraging the expansion of trade and economic growth, and discouraging policies that would harm prosperity. To fulfill these missions, IMF member countries work collaboratively with each other and with other international bodies.
The impact of IMF loans, however, has been widely debated. Opponents of the IMF argue that instead of discouraging policies that would harm prosperity, the loans enable member countries to pursue reckless domestic economic policies knowing that, if needed, the IMF will bail them out. This safety net can delay the needed reforms and creates long-term dependency. Opponents also argue that the IMF rescues international bankers who have made bad loans, thereby encouraging them to approve ever-riskier international investments. How true are these arguments in relation to Sri Lanka?
Sri Lanka joined the IMF on August 29, 1950. Since June 1965, Sri Lanka has taken 17 loans from the IMF including the most recent US$ 3 billion in March of 2023. As it typically does when it lends money, the fund pushed the government of Sri Lanka to change several policies in pursuit of financial stability. With the history of the corrupt rulers in Sri Lanka, it remains to be seen how successful these policies will be this time around.
We researched which Sri Lankan political parties have borrowed IMF money before, under what policies, and what they have done for the country with that money. Since June 1965, Sri Lanka has borrowed SDR 3,585,360,000. If you look at just the last 2 decades, Sri Lanka has borrowed US$ 7.9 billion from the IMF. In 2012, Mahinda Rajapakse borrowed US$ 2.6 billion, the largest since 1965. In 2016, Maithripala Sirisena borrowed US$ 1.5 billion together with the current president Ranil Wickremasinghe who was the prime minister then. Ranil then borrowed the largest ever of US$ 3 billion in March of 2023.
Rajapaksas and their family members and friends are alleged to have looted over US$ 52 billion during the last 16 years through various scams. The current president Ranil is accused of the Central Bank bond scandal in 2018. It will be interesting to find out where all the money these corrupt leaders have borrowed from the IMF in the last 2 decades went and to see what has been accomplished with the borrowed money keeping with the IMF mission of discouraging policies that would harm prosperity and to see if Sri Lanka pursue reckless domestic economic policies after obtaining these loans.
I think the above IMF mission has already failed. As the IMF itself noted with the latest 2023 loan, by 2022, Sri Lanka was hit hard by a catastrophic economic and humanitarian crisis. They said that the economy was facing significant challenges stemming from pre-existing vulnerabilities and policy missteps in the lead-up to the crisis, further aggravated by a series of external shocks. This was after borrowing billions of dollars from the IMF and other lenders. As of 2022, the external public and private debt Sri Lanka owed was $58.7 billion (78% of the GDP). So, what happened to all this money and where is the prosperity IMF expected? Or, has the IMF in the past allowed the member countries to pursue reckless domestic economic policies?
With the latest IMF loan, Sri Lanka is rumored to pay the loans borrowed from India (Peter to Paul scenario I explained earlier). India has previously given financial assurances to the IMF to facilitate a bailout plan to help neighboring Sri Lanka emerge from its worst economic crisis. It is also alleged in Sri Lankan parliament that some of the IMF money will be used to rebuild the houses of the corrupt politicians that were either burnt or destroyed by the protestors. With the latest loan, the government of Wickremasinghe has agreed to enact tough anti-corruption laws as it negotiated with the IMF, which has said that Colombo must rein in the corruption that has been partly blamed for the crisis. In the next article, we will explore what Sri Lanka did with the IMF money loans taken since 2000.