FM Sitharaman calls on IMF and World Bank to give Sri Lanka a low-income label

Sri Lanka could be temporarily classified as a low-income country – from the current status of a middle-income country – to help it restructure its debt. And, it should also benefit from emergency funding similar to that granted to Ukraine.

Those were the recommendations made last week by Finance Minister Nirmala Sitharaman to the International Monetary Fund (IMF) and the World Bank, sources said. It comes as India’s southern neighbor faces the worst economic crisis in its history.

Sitharaman had actively engaged with various representatives of multilateral institutions, including World Bank President David Malpass and IMF Managing Director Kristalina Georgieva in support of Sri Lanka. This was done in order to ease the country’s current financial situation and help it better navigate the maze of international funding rules and criteria, sources familiar with the talks said. “The Minister’s interventions have covered several fronts, including the classification of Sri Lanka as a low-income country and the treatment of Sri Lanka on an equal footing with other countries facing serious emergencies, such as Ukraine. She has also used her position on the IMF board of governors to push Sri Lanka’s case,” an official said.

According to the sources, one of Sitharaman’s main interventions was to argue that, although Sri Lanka was classified as a middle-income country at the start of the pandemic, the nature of its economy, its dependence on income from the sector tourism, and the resulting drop in national incomes due to the pandemic, has meant that the country could eventually be categorized as a low-income country and should be treated accordingly.

“Classification as a low-income country would facilitate Sri Lanka’s debt restructuring process,” one of the sources said.

The official clarified that the process of reclassification by the IMF and the World Bank takes time and therefore it could be done on a temporary basis to help Lanka out of its current crisis.

Graduation to a low-income country will help Sri Lanka restructure its debt under the “Common Framework for Debt Treatment Beyond DSSI”. DSSI is the debt service suspension initiative that was put in place by the IMF and the World Bank after the pandemic and expired in December 2021.

In November 2021, the IMF and the World Bank had put in place the common framework. The countries eligible for these initiatives are low-income countries whose debt is unsustainable.

Sitharaman reportedly argued that due to Sri Lanka’s reliance on the tourism sector, the shock to the country’s economy was largely exogenous in nature and caused by the pandemic.

On March 9, 2022, the IMF’s Executive Board gave the go-ahead for $1.4 billion in additional financing for Ukraine under an emergency assistance program known as the Rapid Financing Instrument (RFI).

Sitharaman reportedly argued that Sri Lanka would also be eligible for assistance under this provision.

The RFI provides rapid access to financial assistance to countries in urgent need of eliminating balance of payments asymmetries, particularly those due to war, and is designed for cases where it is impossible to launch a comprehensive program of economic reforms.

Sources said senior IMF and World Bank officials assured the finance minister that his proposals for Sri Lanka were being considered in detail.

India’s aid so far has come in the form of a $1 billion line of credit to help Lanka procure food, medicine and essential items. There was another line of credit worth $500 million to help him buy petroleum products. In addition, India’s state-owned oil companies have released large amounts of diesel to help Sri Lanka tackle its power shortage.

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