Devjyot & Uditha Jayasinghe

COLOMBO/NEW ELHI – Sri Lanka is planning to seek assistance from the World Bank in order to avert a severe economic recession. There will also be an International Monetary Fund rescue plan that will be reviewed next month by two sources.

Sri Lanka’s foreign reserves have dropped 70% in the past year, making it difficult to import essential goods like fuel. The result has been growing unrest as well as military deployments at gas stations.

The country has a paltry reserve of $2.31 trillion as of February and must pay approximately $4 billion of its debts over the remainder of the year. This includes a $1 Billion international sovereign bond due to mature in July.

Two sources who have direct knowledge told Reuters that Finance Minister Basil Rajapaksa is flying to Washington DC to try to find a solution to the crisis.

One source said that “what we need” was budgetary support. This refers to financial aid the Sri Lankan government will request from the World Bank.

Sri Lanka’s request for World Bank assistance was unmet by the source.

Analysts stated that support is typically extended by the World Bank to improve exports, increase economic competitiveness, and help growth.

For example, in heavily indebted Argentina the World Bank is currently working to approve $2 billion of loan packages for 2022. These include support for infrastructure, environment, and social inclusion projects.

The sources declined to identify themselves because discussions were confidential. They said this assistance would most likely be provided after Sri Lanka enters into an IMF loan programme.

In an answer to Reuters’ questions, the World Bank stated that they were not currently in discussions with Sri Lanka regarding budget support.

The World Bank stated that it was working with authorities to develop a program of structural reforms to support sustainable growth. It also suggested possible future assistance.

A request to comment was not received by the Finance Ministry in Sri Lanka.

‘DAMN TOUGH’

Analysts said that funding amounts would be determined by the IMF’s specific objectives as well as Sri Lanka’s fiscal and trade deficits. They also depend on Sri Lanka’s annual requirements, which could reach up to $3B from bilateral and multilateral sources.

The second source stated that “if they have a credible IMF program then there will be some period, perhaps six to a years, or maybe two, when this will be damn difficult.”

“So, how are people going to survive?” This is why institutions such as the World Bank are able to provide support for budgets.

Analysts believe that an IMF program will focus on restructuring external debt, greater flexibility in exchange rates, and more targeted subsidies. This could be a problem for the poor.

Transparency in energy pricing will also be a factor that could drive up electricity and fuel prices.

According to the second source, the World Bank could encourage direct subsidy transfers, promote green energy, and help develop human capital by improving health, education and social protection.