Thread by @ChayuDamsinghe

What exactly is the process behind the IMF - and why are we doing this IMF thing again?

Why do we need to do this regardless of #GoHomeRajapaksas or not?

#SriLankaEconomicCrisis #SriLankaCrisis #IMFNow #RestructureDebt

(1/19)

First, what is the IMF?

Think of it as an organization that exists to help countries that have screwed up, and need to show to the world that they're now going to change their ways.

Country has to act themselves, IMF gives confidence and support.

(2/19)

Think of it as a naughty kid who tells the teacher, "no no miss, this time I will do my homework" but never does. But when the kid's parents also come along and say that, there's more confidence that this time, the homework will actually get done.

(3/19)

But the IMF isn't allowed to lend money to a country with "unsustainable debt" - essentially a country that can't fix its problems in time. Simple reason - IMF doesn't want their money just going into the hands of some hedge fund.

(4/19)

So a condition the IMF has here is for us to make our debt sustainable first. That means restructuring our debt (explained elsewhere, will link here).

So while we can start talking to IMF now, and negotiating, no money can come in until we get to a sustainable debt path.

(5/19)

So while the debt negotiations are happening in background, we talk to IMF, and what other things we're willing to do to fix our situation.

These are things, in the IMF's view, will help stabilize the situation and help us recover.

(6/19)

Of course, this is where the contention lies - what if the IMF is wrong?

Thing is, we don't need the IMF to realize these policies need to change. We have no power, gas, food, medicine. Reserves are critically low.

(7/19)

On this, there is broad consensus (and backed up by so many examples across the years) of what can fix things economically.

Reduce your need to borrow by reducing difference between income and expenditure. IAnd given short term nature of issue, need short term solutions.

(8/19)

But what about the medium term? Won't these policies worsen the medium term?

I'd argue that powercuts do so far more. There's no argument to be had there.

But once the powercuts improve, countries often reverse track and get in the same mess again.

(9/19)

That's why this "16 times to the IMF" situation happens.

It's like if you, as someone who can't swim, keep jumping into the sea. 16 times the lifeguard saves you. It's not the lifeguard's fault you jump in a 17th time without learning to swim.

(10/19)

But the policies needed are tough. There's no question about it. And each country has different politics on what's possible.

SL, for example, will find it hard to privatize massively. But raising interest rates is much easier given our savings bent population.

(11/19)

So all of these things get discussed with the IMF, and the country will present a plan and negotiate until it's enough to stabilize the situation. In the meantime, we'll implement some of this.

Once it is, the IMF and the country agree to carry out the plan.

(12/19)

Once this agreement is approved by the IMF board, then they will give us an initial amount of money.

However, getting here takes time. If we're really lucky, in 2-3 months. Else, could even be a year or more. Realistically it'll likely be closer to the end of 2022.

(13/19)

But our urgent catastrophe won't be solved by this, right?

It won't. But the fact that we're finally engaging with the solutions that everyone (including India and China btw) agrees that SL needs gives confidence.

That means we can get support to survive till then.

(14/19)

It's no coincidence the Indian credit lines announced in January took until April to come into effect. It was end-March when we finally said we're going to the IMF (though not clearly enough).

Clearer communication and actual engagement will likely mean more support.

(15/19)

So we survive until the first bit of money from the IMF. After the IMF and SL agrees, our multilateral partners like the ADB and WB can also help. So there's more support coming from there as well, both for short term support and long term capacity building.

(16/19)

But the IMF doesn't give all the money at once. We need to stick to the programme if we need to get it all. Once every few quarters, they'll extend more money after a review if we have stuck to the programme.

We should. Otherwise we're back here again.

(17/19)

A crucial difference between this time and previous times, is that we need debt restructuring and it's difficult to quickly recover back to a place where we can ignore the IMF. We've come so low that there's essentially no alternative than sticking to these policies.

(18/19)

So let's hope we can do so. Stick to the policies, get out of this mess, and stay out. The recovery process, if we do it properly, can also mean a great future. But IMF or not, we need to stick to proper policy, not the nonsense that got us here.

I hope we will.

(19/19)