The Pulse

IMF’s Package to Sri Lanka Includes Corruption Fixing

Recent Features

The Pulse | Economy | South Asia

IMF’s Package to Sri Lanka Includes Corruption Fixing

But is the governance diagnostic exercise just another tool to legitimize its austerity measures?

IMF’s Package to Sri Lanka Includes Corruption Fixing

Workers fill gas in vehicles at a fuel station in Colombo, Sri Lanka, Wednesday, March 29, 2023.

Credit: AP Photo/Eranga Jayawardena

On March 20, the International Monetary Fund (IMF) extended a $2.9 billion Extended Fund Facility (EFF) to support Sri Lanka.

The approval is expected to pave the way for other financial institutions to extend support to the bankrupt South Asian country.

An important issue that IMF officials flagged at the time of announcing the EFF support to Sri Lanka was government corruption. The IMF would assess corruption and provide recommendations. Sri Lanka has become the first Asian country to be subjected to a comprehensive governance diagnostic exercise.

According to those who support the deal and the path set by the IMF, this exercise is supposed to be a valuable tool in improving the country’s governance and economic systems. However, critics, including human rights organizations and left-leaning political parties, express skepticism and contend that these measures are designed to justify and legitimize the implementation of austerity policies.

Sri Lanka has been in discussions with the IMF since early 2022, following the worst economic crisis it has been facing since its independence, and had embarked on a number of reforms following IMF recommendations.

This is not the first time Sri Lanka had sought IMF assistance. It received IMF funding four times between 1965 and 1969, twice between 1971 and 1974, four times between 1977 and 1988, once in 1991, four times between 2001 and 2009, and finally in 2016.

However, Sri Lanka has not previously faced an economic disaster of this magnitude, nor has it been subjected to such stringent conditions as those imposed in the current IMF deal.

On the day after the deal was announced, President Ranil Wickremesinghe told Parliament that Sri Lanka is no longer a bankrupt nation and that they have received the first tranche of the funds, $333 million. Wickremesinghe insisted that they expect to access another $7 billion of “rapid credit support” from several multilateral sources including the World Bank, and the Asian Development Bank. Another $7 billion will take Sri Lanka’s foreign debt to $62 billion.

The president also insisted that the IMF funding sends the world a signal that Sri Lanka is going forth with a plan for economic recovery and gives Sri Lankan banks the access to international financial institutions. In his speech, Wickremesinghe also said that significant changes would be made in the way the nation is governed, its fiscal and monetary policy, tax regime, corruption mechanisms, etc.

As the president told Parliament, the IMF money came with a number of conditions.  At the press conference announcing the deal, Breuer said that the IMF has emphasized that anti-corruption and governance reforms are central pillars of the program. He added that the IMF will subject Sri Lanka to a comprehensive governance diagnostic exercise, making it the first Asian economy to undergo such an exercise.

What is a governance diagnostic exercise?

Delivering the opening remarks for the press briefing on the IMF Executive Board Approval of the Extended Fund Facility (EFF) Arrangement for Sri Lanka, IMF representatives said that it is “indispensable to ensure the hard-won gains from the reforms benefit the Sri Lankan people” and that the government has agreed to “fundamentally improve public financial management and strengthen the anti-corruption legal framework in line with the United Nations Convention against Corruption.”

“In addition, the IMF is conducting an in-depth governance diagnostic exercise, which will assess corruption and governance vulnerabilities in Sri Lanka and provide prioritized and sequenced recommendations. Sri Lanka will be the first country in Asia to undergo a governance diagnostic exercise by the IMF. We look forward to further engagement and collaboration with stakeholders and civil society organizations on this critical reform area,” IMF officials said.

The IMF in recent years has done such governance diagnostic exercises in Moldova, the Republic of Congo, Mauritania and Zambia. The reports on Moldova, Republic of Congo and Zambia are online and one on Mauritania should be released soon.

The IMF considers that these assessments are tools that countries can use to establish effective governance arrangements and enhance the rule of law. In all three countries the IMF teams looked at the governance of the central bank, the financial sector, the fiscal sector, the protection of contract and property rights, the tax regime and anti-money laundering. Given what both the IMF and the president have spoken, it is quite clear that the exercise on Sri Lanka would look at the same things.

The IMF states that “When a country borrows from the IMF, the government agrees to adjust its economic policies to overcome the problems that led it to seek financial assistance. These policy adjustments are conditions for IMF loans and help to ensure that the country adopts strong and effective policies.”

The organization insists that these conditions help countries to solve balance of payments issues “without resorting to measures that harm national or international prosperity.”

There is a growing body of evidence suggesting that the implementation of reforms attached to IMF loans often leads to an increase in labor rights violations, domestic violence, and repression. It is particularly pertinent to note that the Sri Lankan government is currently undertaking measures to fully implement the IMF reforms, which has resulted in the approval for the sale of several State Owned Enterprises that are profitable. This decision is based on the premise that the state should not be involved in business. However, this has led to a number of trade unions commencing strikes, which in turn has prompted the deployment of military forces to quell industrial action. These developments are a cause for concern, particularly with regard to their potential implications for human rights and labor standards in Sri Lanka.

Commenting on the IMF agreement, Amnesty International Senior Director Deprose Muchena, who is currently in Sri Lanka to launch its 2023 report on human rights, said that IMF recommendations have often led to a decline in the welfare of the people.

Muchena told The Diplomat said he is not aware of details of IMF governance diagnostic exercise in Sri Lanka but will meet IMF representatives within the week to gather information on the agreement.

The IMF usually places restrictions on fiscal and monetary policy of a government, and these often prevent governments from making necessary steps to finance welfare, he said.

“In 2022, there were massive protests in Sri Lanka. There was a call for transparency, good governance and human rights and these demands must be respected. Any agreement with the IMF must not violate the rights of the people,” he said.