IMF’s Extended Fund Facility (EFF) for Sri Lanka

In News: The International Monetary Fund (IMF) announced a staff-level agreement with Sri Lanka, months after the island nation’s economic crisis intensified this year, following a serious Balance of Payments problem.

What is the staff-level agreement?

• It is a formal arrangement by which IMF staff and Sri Lankan authorities agree on a $2.9-billion package that will support Sri Lanka’s economic policies with a 48-month arrangement under the Extended Fund Facility (EFF).
• However, even though the IMF has agreed to support Sri Lanka, the EFF is conditional on many factors.
• Sri Lanka must take a series of immediate measures that the Fund has deemed necessary to fix fiscal lapses and structural weaknesses — such as raising fiscal revenue, safeguarding financial stability and reducing corruption vulnerabilities.
• Apart from making domestic policy changes to strengthen the economy, Sri Lanka must also restructure its debt with its multiple lenders.
• The IMF has said that it will provide financial support to Sri Lanka only after the country’s official creditors give financing assurances on debt sustainability, and when the government reaches a collaborative agreement with its private creditors.

How will IMF funds will help Sri Lanka?

• The package will help raise government revenue to support fiscal consolidation, introduce new pricing for fuel and electricity, hike social spending, bolster central bank autonomy, and rebuild depleted foreign reserves.
• Starting from one of the lowest revenue levels in the world, the bailout programme will implement major tax reforms. These reforms include making personal income tax more progressive and broadening the tax base for corporate income tax and VAT.
• The programme aims to reach a primary surplus of 2.3% of GDP by 2024.
• The IMF package, to be paid in tranches over the next four years, is less than what India provided to Sri Lanka over four months.
• However, an IMF loan will boost the receiving country’s credit ratings, and the confidence of international creditors and investors.

What is the International Monetary Fund (IMF)?

• The International Monetary Fund (IMF) is an organization of 190 member countries, each of which has representation on the IMF’s executive board in proportion to its financial importance, so that the most powerful countries in the global economy have the most voting power.

MUST READ:    Sri Lankan Economic Crisis

MUST READ:    IMF’s Lending instruments

Source: The Hindu

Previous Year Question

Q.1) “Rapid Financing Instrument” and “Rapid Credit Facility” are related to the provisions of lending by which of the following: (2022)

1. Asian Development Bank
2. International Monetary Fund
3. United Nations Environment Programme Finance Initiative
4. World Bank

Q.2) Recently, which one of the following currencies has been proposed to be added to the basket of IMF’s SDR? (2016)

1. Rouble
2. Rand
3. Indian Rupee
4. Renminbi