For Prelims:Significance of the IMF, the Growth rate of GDP, Tamil Community, 

For Mains:Crisis in Sri Lanka and the Consequences of the Crisis.

Why in the news?

Recently, the IMF gave its acceptance to the preliminary agreement. With Sri Lanka. It aims at achieving economic stability and debt sustainability for the crisis. 

What steps is Sri Lanka's economy taking to strengthen its economy?

  • Growth in Income:
    • The budget of the nation aims to decrease public debt in order to increase revenue from 8.2% of GDP at the end of 2021 to 15% of GDP by 2025.
      • In order to increase personal income tax collections, the measures include raising the VAT from 12 to 15% and making tax registration mandatory for all adults 18 and older.
      • A total of 50 state-owned businesses are up for sale.
  • Age of retirement should be lowered:
    • In government and semi-government organizations, the retirement age has been lowered from 65 to 60, respectively.
  • Banking industry
    • To address the need for recapitalization caused by loan defaults brought on by the financial crisis, employees and depositors will be offered 20% ownership stakes in state banks.

What do we need to know about the International Monetary Fund (IMF)?

About:

The International Monetary Fund (IMF) is an international organization that promotes global economic growth and financial stability, encourages international trade, and reduces poverty.

Conditionalities set by the IMF:

  • When a country borrows from the IMF, its government agrees to adjust its economic policies to overcome the problems that led it to seek financial aid.
  • These policy adjustments are conditions for IMF loans and serve to ensure that the country will be able to repay the IMF.
  • This system of conditionality is designed to promote national ownership of strong and effective policies.
  • Conditionality helps countries solve balance-of-payments problems without resorting to measures that are harmful to national or international prosperity.

What is the bailout package offered to Sri Lanka?

  • The Economic Crisis of Sri Lanka, with USD 51 billion debt which was caused due to various reasons:
  • The Easter bomb blasts of April 2019 in churches in Colombo
  • The government's policy of lower tax rates and wide-ranging subsidies for farmers during their campaign.
  • The Covid-19 pandemic in 2020, which impacted exports of tea, rubber, spices, garments, and the tourism sector.

Policy commitments agreed with a country's authorities can take different forms. They include

  • Prior actions: These are the steps a country agrees to take before the IMF approves financing or completes a review. They ensure that a program will have the necessary foundation for success.
  • Quantitative performance criteria (QPCs): Specific, measurable conditions for IMF lending always relate to macroeconomic variables under the control of the authorities. Such variables include monetary and credit aggregates, international reserves, fiscal balances, and external borrowing.
  • Indicative targets (ITs): In addition to QPCs, ITs may be set for quantitative indicators to assess progress in meeting a program’s objectives.
  • Structural benchmarks (SBs): These are reform measures that are often non-quantifiable but are critical for achieving program goals and are intended as markers to assess program implementation.

Work of IMF

  • Both locally and remotely from the IMF's headquarters, staff members provide country officials with professional advice. These visits are focused on specific issues and are requested by the member country; depending on the request of the country authority, the staff may stay in-country for a brief time or be based permanently in an agency.
  • Under the direction of the IMF's headquarters, a network of regional capacity development centers offers direct assistance to nations. With the help of these centers, regional integration is promoted, knowledge sharing can be better tailored to local needs, and the capacity to react quickly to emerging needs is increased.
  • Government employees can receive specialized macroeconomic and financial training in person or online. The general public can also receive online training through massive open online courses offered in collaboration with edX.

Main Purpose of IMF

  • The abundance of information now available on the IMF's website serves as evidence of the organization's growing openness and transparency. In addition, it promotes openness among its participants.
  • It is acting to improve economic governance. It is encouraging, for instance, the use of standards and codes as tools for good corporate governance and economic and financial management.
  • As a matter of global public interest, it works to preserve the stability and integrity of the global financial system. The core of initiatives to strengthen financial sectors and combat money laundering in member countries is the joint IMF-World Bank Financial Sector Assessment Program (FSAP).
  • By simplifying the requirements for IMF-supported programs, it promotes true national ownership of reforms. Conditionality is still necessary, but nations must be accountable for carrying out the required reforms.
  • The IMF is a body that is open to hearing from and learning from people other than the governments that make up its membership. It acknowledges and values the part played by civil society organizations in laying out the ethical precepts for group action and garnering popular support.