The International Monetary Fund has terminated talks with Sri Lanka after failing to reach an agreement on a rescue package for the near-bankrupt country after 10 days.
Nonetheless, the IMF agreed to continue the talks, which began on June 20, in a statement posted about midday Sri Lanka time on Thursday. “Discussions will virtually continue with a view to securing a staff-level agreement on the extended fund facility or EFF arrangement,” it stated.
According to the IMF, the EFF was intended to assist countries with “severe payment imbalances.” Furthermore, it gives support for initiatives “necessary to rectify structural inequalities over time.”
Sri Lanka, an island nation of 22 million people, is experiencing its biggest financial crisis since its independence in 1948, forcing it to default on some international debt.
With only enough fuel for a week and fresh cargoes at least two weeks away, Sri Lanka has imposed restrictions on supplies, limiting them to use for public services such as trains and buses, as well as those related to the health sector, according to Reuters. The prohibition will be in effect for two weeks.
Noting that the country’s public debt is considered unsustainable, the IMF stated that acceptance of a package would necessitate “sufficient financing assurances from Sri Lanka’s creditors that debt sustainability will be restored.”
People have died, and there have been a few shootouts. As a result, this is an extremely risky condition.
“In this context, discussions focused on designing a comprehensive economic program to correct the macroeconomic imbalances, restore public debt sustainability, and realize Sri Lanka’s growth potential,” the press release said.
The absence of a bailout deal confounded an analyst CNBC talked with earlier in the day. According to Georgetown University professor Shanta Devarajan, Sri Lanka is on the verge of reaching an agreement with the IMF.
″[Sri Lanka is] very close to reaching what is called a staff level agreement [with] the Fund [on] the set of policies and programs that Sri Lanka would undertake in order to bring down the fiscal deficit and make the fiscal debt sustainable,” Devarajan told CNBC’s “Squawk Box Asia” on Thursday.
He connected the current crisis back to tax cutbacks three years ago.
“We are in this mess at the moment…because in November 2019, the government cut taxes substantially. The value added tax rate went from 15% to 8%,” Devarajan said.
He went on to say that the country is on the danger of devolving into a “fragile state.”
“It has all the characteristics [of a fragile state] at the moment. It’s not just the protests in the streets, but … the queues for fuel,” he said, adding that there are now confrontations with the army and the police in various places.
“People have been killed; there have been some shootouts. So this is a very dangerous situation to be in,” Devarajan said.
Sri Lanka has shuttered urban schools, and officials have asked locals to work from home.
(Adapted from EconomicTimes.com)