Bankrupt Sri Lanka, struggling to cope up with the deepening economic-political-social crisis, agreed, in late July 2024, to implement an IMF-led economic recovery programme, backed by Extended Fund Facility (EFF).
Having self-declared the country insolvent in April 2022, political parties, represented in Parliament, had no alternative but to accept the International Monetary Fund’s (IMF) dictates to overcome it.
This was the 17th IMF bailout for Sri Lanka and the third since the country brought the war against the Liberation Tigers of Tamil Eelam (LTTE) to a successful conclusion in May 2009.
The much discussed EFF arrangement, approved in March 2023, with a total amount of SDR (Special Drawing Rights) 2.3 billion, was definitely the high point in UNP leader Ranil Wickremesinghe’ presidential tenure (July 22 to Sept 2024).
Sri Lanka received the first $330m tranche of the IMF bailout package in March 2023.
The then President Ranil Wickremesinghe and the UNP repeatedly proclaimed that the finalisation of the EFF arrangement was a huge achievement. The Opposition obviously accepted that position when the entire Opposition skipped an opportunity to vote against two controversial Bills that tied up Sri Lanka with the IMF.
Having lambasted Wickremesinghe for the IMF agreement, the main Opposition Samagi Jana Balawegaya (SJB), Sri Lanka Podujana Peramuna (SLPP) and national People’s Power (NPP) quietly backed two Bills that were designed to ensure compliance with the widely criticised ‘deal’ with the IMF. The consensus among political parties was nothing but a personal victory for Wickremesinghe who hadn’t received a public mandate to exercise executive powers as the President. Amidst political turmoil, the SLPP-controlled Parliament elected Wickremesinghe as President to complete Gotabaya Rajapaksa’s five-year term, won at the 2019 November presidential election and fearing mob justice otherwise, as was allowed to happen in Bangladesh. That was done at the expense of their own man Dullas Alahapperuma.
The Parliament issued the following statement in the evening of July 24, 2024: “Public Financial Management and Economic Transformation Bills passed in Parliament today (Jul. 25) with amendments and without a vote. Amendments were incorporated to the bills during the committee stage and subsequently, the third reading was passed without a vote. These two bills were presented to Parliament on 22 May 2024.”
Whatever the differences, the Parliament unanimously endorsed the two Bills that made the outcome of the presidential and parliamentary elections irrelevant. Regardless of promises and declarations made by Ranil Wickremesinghe (Independent), Sajith Premadasa (SJB), Anura Kumara Dissanayake (NPP) and Namal Rajapaksa (SLPP) on election platforms, all of them were bound by the IMF agreement. There was no escape for political parties.
Wickremesinghe and his associates repeatedly declared the IMF agreement as the panacea for Sri Lanka’s economic crisis. Wickremesinghe knew he couldn’t win the presidential election under any circumstances. Premadasa, too, realised that he didn’t have an opportunity at all in beating Dissanayake at the presidential election though he addressed rallies as if he was certain of victory.
The failure on the part of Premadasa and Wickremesinghe to reach consensus on the former’s candidature at the presidential contest ensured Dissanayake’s victory. Had the SJB and the UNP reached an agreement, Dissanayake’s victory could have been thwarted. Together they polled over 6.5 mn votes whereas Dissanayake could secure only 5.6 mn. Obviously Wickremesinghe felt much more comfortable with Dissanayake as President than Premadasa, the one-time deputy leader of the UNP.
The UNP knew Wickremesinghe’s decision to contest the presidential election not only ensured Dissanayake’s victory but caused irreparable damage to the SLPP. However, Dissanayake is now under pressure from the IMF to meet the bailout conditions or face the consequences.
President Dissanayake, who also holds the Finance portfolio, is under pressure to increase electricity tariffs in line with the IMF formula.
Stark warning from IMF
IMF spokesperson Julie Kozack recently warned that the final approval of the fourth review of the ongoing programme depended on the government completing, what she called, prior actions, including restoring electricity cost recovery pricing.
All political parties represented in Parliament, including the NPP, regardless of what they told the electorate during the presidential and parliamentary elections, now acknowledge privately Sri Lanka wasn’t in a position to go back on the agreement with the IMF.
The key prerequisite for the IMF Board Meeting on the fourth review is nothing but a significant increase in the pricing formula, not only for electricity, but in turn may extend to water and other basics.
International news agencies quoted Kozack as having said that the main prior actions related to restoring electricity cost recovery pricing and ensuring proper function of the automatic electricity price adjustment mechanism.
In other words, USD 344 million in financing – the fourth tranche – has been put on hold.
President Dissanayake is under pressure to break a key promise made during the costly promises-filled polls campaigns last year. Dissanayake’s promise to reduce electricity rates by 30 percent is irrelevant against the backdrop of the IMF’s stark warning. The agreement between Sri Lanka and IMF that had been endorsed by Parliament in July 2023, overnight, made the Public Utilities Commission of Sri Lanka (PUCSL) irrelevant.
The government owed the public an explanation whether the agreement with the IMF hindered the PUCSL, established in terms of the Public Utilities Commission of Sri Lanka Act No 35 of 2002. If the pricing formula entirely depends on the proposed automatic electricity price adjustment mechanism the government cannot justify the operation of PUCSL.
The IMF has emphasised, in no uncertain terms, that Sri Lanka shouldn’t expect any opportunity to side-step what the lending agency called prior actions.
So, unless President Dissanayake increased electricity tariffs in line with the IMF’s formula, the EFF programme could be halted. That is the ugly truth. Perhaps President Dissanayake should disclose how political parties, represented in the previous Parliament, reached consensus on Public Financial Management and Economic Transformation Bills. At that time the NPP decided not to ask for division, there were only three NPP lawmakers in Parliament. The NPP group consisted of Anura Kumara Dissanayake, Vijitha Herath and Dr. Harini Amarasuriya. Today, the NPP parliamentary group comprises 159 lawmakers.
Having accepted both controversial Bills, the SJB now attacks the NPP over the proposed hike in electricity tariffs.
During the last phase of the parliamentary election campaign, President Dissanayake assured the country of a staggering 30% power tariff reduction in the near future with no intention to fulfill it. This false assurance was given on Nov 09, 2024, at Dambulla. The electorate was deceived. That was deliberate on the President’s part. Dissanayake couldn’t have been unaware that whoever won the parliamentary election the IMF expected the full implementation of the agreement.
Although the PUCSL initiated a public consultations process in line with the Electricity Act, President Dissanayake, in the first week of May, disclosed the decision to go ahead with the electricity tariff hike. The declaration was during a live discussion on Sirasa. Therefore, there cannot be any ambiguity over Sri Lanka adhering to the IMF agreement. The NPP has no option but to implement the agreement with the IMF.
Hideaki on IMF formula
The Japanese Ambassador in Sri Lanka, Mizukoshi Hideaki, emphasised the importance and the responsibility on the part of Sri Lanka to implement the IMF formula. Hideaki, in an exclusiveinterview with the writer last August, in the run-up to the parliamentary election, declared that whoever wins the September 21 contest, the winner should adhere to, what he called, IMF remedies (Post-Aragalaya economic recovery depends on implementation of IMF formula – Japanese ambassador, The Island, August 21, 2024).
Declaring that the position taken by creditors wasn’t meant to favour the then President Wickremesinghe, Hideaki said: “For Sri Lanka to achieve economic recovery, it is crucial to restore the international community’s trust. To this end, it is essential to steadily implement the various economic and social reforms laid down as conditions by the IMF, which is also the basis for the agreement on the debt restructuring.
Indian High Commissioner Santosh Jha expressed similar sentiments during an informal meeting with a selected group of journalists also in the run-up to the general election.
The country is in such a desperate situation, though there were no queues as during Gotabaya Rajapaksa’s presidency, the government needs to complete the four-year IMF programme. Increasing electricity tariff is not only inevitable but a necessity, though politically damaging, especially at a time the NPP had suffered a significant drop in votes within seven months.
Electricity tariff hike ahead of the forthcoming Provincial Council polls may further undermine the NPP’s vote base and provide a boost for the Opposition. But Dissanayake is not in a position to delay the process as the IMF intends to wrap up the work on the next tranche of funding.
The NPP cannot go back on its pledge to reduce electricity tariffs without losing further public support. The outcome at the Provincial Council election proved that the ruling party, in spite of having a commanding 2/3 majority in Parliament, is vulnerable. Loss of 2.3 mn votes out of 6.8mn that the NPP received at the parliamentary election, just seven months before, and the setback the government suffered in the predominantly Tamil speaking areas, underscored the developing difficulties.
Against that background, the NPP may find IMF conditions extremely difficult to meet but has no choice. Sri Lanka’s record in implementing IMF remedies is poor. Once the Treasury Secretary Mahinda Siriwardana, appearing on state run Rupavahini at the height of the economic crisis, pointed out how Sri Lanka deceived the IMF even during its previous engagements with the lending body. Siriwardena issued a dire warning to the powers that be against not adhering to IMF remedies. The outspoken official’s message was clear – If Sri Lanka bungled this opportunity that would be the end of the ongoing recovery process. Whatever corrupt politicians say to hoodwink voters the country is not out of the woods yet.
The country is in a critical juncture. President Dissanayake, in his capacity as the Finance Minister, is confronted with difficult choices. His government must prudently decide between economic relief and adherence to the IMF’s fiscal targets. Deviating from these targets can jeopardise the country’s access to multilateral financing from institutions, like the ADB and World Bank, which is essential for maintaining foreign currency inflows, necessary in line with the overall recovery process. The NPP cannot ignore that though IMF financial support is limited, its endorsement is crucial for unlocking broader international aid.
The NPP leadership will have to keep in mind that moratorium on repayment of loans ends in 2027 and the responsibility for accumulation of USD reserves lies with the administration. Sri Lanka has no option but to meet its obligations.
The government is unable to rectify sluggish job growth, declining living standards, and rising poverty. Therefore, finding effective policy tools to facilitate a robust recovery has become increasingly urgent.
Case of Pakistan
Former President Wickremesinghe has repeatedly appreciated India’s role in facilitating IMF bailout within months after he succeeded Gotabaya Rajapaksa whose government foolishly rejected the lending agency’s help. By the time the Rajapaksa administration realised irrationality in its much-touted domestic solution, the national economy was in tatters.
Against the backdrop of India interceding on behalf of Sri Lanka with the IMF, New Delhi’s opposition to Washington-based lending agency granting a fresh bailout of USD 1 bn to Pakistan seems contentious.
Indian Defence Minister Rajnath Singh is on record as having alleged, at Bhuj airbase in Gujarat, that Pakistan would certainly utilise a significant portion of the fresh bailout package to rebuild, what he called, the terrorist infrastructure destroyed in operation Sindoor, mounted in response to the Pahalgam massacre on April 22, 2025.
The IMF disregarded India’s concerns. When compared with the IMF bailout package amounting to USD 3 bn to Colombo, the facility made available to Pakistan is much bigger. The IMF has agreed to support Pakistan with a total of $7 billion under the EFF programme. Pakistan received USD 2.1 billion in two separate instalments before the latest tranche of $1 billion was made after the IMF completed its first review of Pakistan’s progress.
Director of the IMF’s communications department Julie Kozack recently explained that under the circumstances the lending agency released USD 1 bn to Pakistan. Kozack dismissed claims of Pakistan utilising IMF funds for rebuilding terrorist infrastructure as money was subjected to tight controls meant to ensure proper utilisation.
Pakistan has denied having a hand in the Pahalgam attack. India’s all-out campaign against Pakistan over its role in international terrorism reminds us of what India did in Sri Lanka. New Delhi’s politically-motivated (no less a person than their National Security Advisor the late J.N. Dixit, admitted Indian intervention here based on political reasons, in his memoirs released in 2005, a year before Sri Lanka launched offensive action (Aug 2006-May 2009).
As combined Sri Lankan armed forces were engaged in large scale operations on the Vanni east front, various interested parties made a desperate bid to halt IMF funding for Sri Lanka. They sought to delay the USD 1.9 bn loan facility to discourage President Mahinda Rajapaksa from bringing the war to a successful conclusion.
In spite of President Rajapaksa’s rejection of a joint UK-France request to call off the Vanni offensive, the UN Security Council asserted that halting the IMF package was not their responsibility.
The then British Foreign Secretary David Miliband and his French counterpart Bernard Kouchner met President Mahinda Rajapaka during the last week of April 2009 as ground forces were making rapid progress on the Vanni east front.
Interested parties had been pushing hard to deprive Sri Lanka of IMF facility after the LTTE’s failure to halt the ground offensive. As long as they felt confident in the LTTE’s military capacity, those demanding accountability on Sri Lanka’s part today never wanted peace. They explored all possible avenues after the LTTE began retreating on all fronts. The bid to halt IMF funding for Sri Lanka should be examined in that context.
The LTTE lobby had been so influential it was able to reach the then US Secretary of State Hillary Clinton whose shocking involvement with the group surprised many. Even after the end of the conflict, the Human Rights Watch (HRW) demanded that the IMF should insist that the government of Sri Lanka address significant post-conflict human rights abuses as part of the approval for a USD 2.5 billion stand-by loan.
The IMF’s handling of funding during the last phase of the conflict, and after, proved that the lending agency couldn’t be influenced by external interventions.
The NPP will have to abide by the IMF remedies or face the consequences. In the run up to the presidential election, the IMF delegation met the NPP team. The meeting that was held at the Shangri-La on 14 March 2024, discussed Sri Lanka’s debt restructuring and anti-fraud processes were discussed at length.
Senior Mission Chief of the Fund, Peter Breuer, led the IMF. The delegation included Assistant to the Director of the Asia and Pacific Department at the IMF Katsiaryna Svieydzenka, and IMF Staff Manavee Abeywickrama.
Representing the NPP at the meeting were party executive members MP Vijitha Herath and Muditha Nanayakkara, and members of the party’s Economic Council Professors Anil Jayantha, Seetha Bandara, and Harshana Suriyapperuma, and former MP Sunil Handunnetti.
The Shangri-La meeting followed a meeting held on January 18, 2024, at the JVP head office at Pelawatte, Battaramulla.
The IMF had been fully involved with political parties during the presidential election campaign last year hence all knew what the IMF remedies were. All political parties exploited the situation to their advantage with the SJB and NPP once boycotting a meeting called by the then President Wickremesinghe with the IMF.
