COLOMBO, Sri Lanka (AP) — The International Monetary Fund said on Tuesday it is evaluating Sri Lanka’s governance in the first case of an Asian nation facing corruption under a bailout program.
On Monday, the IMF’s executive board approved a nearly $3 billion bailout plan for the bankrupt country, with about $333 million due immediately to help ease the country’s humanitarian crisis. The approval will also unlock financial support from other institutions.
Sri Lanka suspended payment of its debt last year due to a shortage of foreign exchange needed to pay for imports of fuel and other necessities. The shortage led to street protests that forced the President of Sri Lanka to resign. The economic situation has improved under current President Ranil Wickremesingh, but his plans to privatize state-owned companies have been objected to.
The senior head of the IMF mission to Sri Lanka said the development lender is “conducting an in-depth governance diagnostic that will assess corruption and governance vulnerabilities in Sri Lanka and provide priority and consistent recommendations.”
“Sri Lanka will be the first country in Asia to pass the IMF’s governance review. We look forward to further engagement and collaboration with stakeholders and civil society organizations in this important area of reform,” Peter Breuer told reporters.
Since last year, Sri Lankans have taken to the streets demanding accountability for alleged corruption and the return of assets allegedly stolen by members of the former ruling family. Government critics say bribery has been a major factor in the country’s economic crisis.
“Sri Lanka is facing huge economic and social challenges in a severe recession amid high inflation, depleted reserves, unsustainable public debt and heightened financial sector vulnerability,” IMF Managing Director Kristalina Georgieva said on Monday.
“Institutions and governance systems require profound reforms,” she said.
With IMF approval, Sri Lanka will no longer be considered a bankrupt country and the country can resume its normal operations, Wickremesinghe said in a brief statement on Tuesday.
“As our foreign exchange improves, we will gradually lift restrictions on imports. In the first cycle, we will deliver essential goods, medicines and goods needed by the tourism industry,” Wickremesinghe said, adding that he expects to bring the agreement with the IMF to parliament after a detailed statement on Wednesday.
The IMF’s approval will open access to up to $7 billion in funding from it and other international financial institutions, Wickremesinghe’s office said earlier.
The final hurdle to approval was removed earlier this month when China joined Sri Lanka’s other creditors in issuing debt restructuring guarantees.
Sri Lanka dramatically increased its income tax and eliminated electricity and fuel subsidies, meeting the terms of the IMF program. These steps further burdened the public. The authorities must now discuss with Sri Lanka’s creditors how to restructure its debt.
“The economic impact of the reforms on the poor and vulnerable needs to be mitigated with appropriate measures,” Breyer said.
“Tax reforms under the program are designed to be progressive, that is, to provide higher contributions from individuals with high incomes. Efforts to increase tax revenue must be carried out in a growth-friendly manner while protecting the poor and most vulnerable,” he said.
Sri Lanka’s foreign exchange reserves have dried up as tourism and export earnings dried up during the COVID-19 pandemic, and the country has faced large debt repayments on mega-projects funded by Chinese and other international lenders that have not generated enough revenue. He also used his foreign exchange reserves to try to stabilize the Sri Lankan rupee.
Since Wickremesinghe took over from ousted ex-President Gotobai Rajapaksa, he has managed to reduce power shortages and end hours of daily blackouts. The central bank says its reserves have improved and the black market no longer controls foreign exchange trading.
However, unions are opposed to Wickremesinghe’s plans to privatize state-owned companies as part of his reform agenda. Public discontent could flare up if he does not take action against the Rajapaksa family, which people believe is responsible for the economic crisis.
Wickremesinghe’s critics accuse him of shielding the Rajapaks, who still control most of the legislators in parliament, in exchange for their support for his presidency.
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