• The International Monetary Fund (IMF) has approved a $3 billion bailout programme to help debt-ridden Sri Lanka overcome its economic crisis and catalyse financial support from other development partners.

• The IMF’s Executive Board approved a 48-month extended arrangement under its Extended Fund Facility (EFF) with an amount of SDR 2.286 billion (about $3 billion).

• Special Drawing Rights (SDR) are supplementary foreign exchange reserve assets defined and maintained by the IMF. The SDR is not a currency, but its value is based on a basket of five currencies — the US dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.

Crisis in Sri Lanka

• Sri Lanka has been hit hard by a catastrophic economic and humanitarian crisis.

• In April 2022, Sri Lanka declared its first-ever debt default in its history as the worst economic crisis since independence from Britain in 1948 triggered by forex shortages sparked public protests.

• Months-long street protests led to the ouster of the then-president Gotabaya Rajapaksa in mid-July. Rajapaksa had started the IMF negotiations after refusing to tap the global lender for support.

• Sri Lanka has introduced painful economic measures such as tax hikes and utility rate hikes to unlock the programme. Trade unions and opposition groups have organised protests against such measures.

• The economy is facing significant challenges stemming from pre-existing vulnerabilities and policy missteps in the lead-up to the crisis, further aggravated by a series of external shocks.

• The EFF-supported programme aims to restore Sri Lanka’s macroeconomic stability and debt sustainability, mitigate the economic impact on the poor and vulnerable, safeguard financial sector stability, and strengthen governance and growth potential.

International Monetary Fund (IMF)

• The IMF was conceived in July 1944 at the United Nations Bretton Woods Conference in New Hampshire, US. 

• The 44 countries in attendance sought to build a framework for international economic cooperation and avoid repeating the competitive currency devaluations that contributed to the Great Depression of the 1930s. 

• The IMF’s primary mission is to ensure the stability of the international monetary system — the system of exchange rates and international payments that enables countries and their citizens to transact with each other.

• Today, its membership embraces 190 countries, with staff drawn from 150 nations.

• India is a founder member of the IMF.

• Its headquarters is situated in Washington, D.C. 

• The IMF is accountable to its member country governments. 

• The Board of Governors, the highest decision-making body of the IMF, consists of one governor and one alternate governor for each member country. The governor is appointed by the member country and is usually the minister of finance or the governor of the central bank. 

International Monetary Fund (IMF)

• The IMF was conceived in July 1944 at the United Nations Bretton Woods Conference in New Hampshire, US. 

• The 44 countries in attendance sought to build a framework for international economic cooperation and avoid repeating the competitive currency devaluations that contributed to the Great Depression of the 1930s. 

• The IMF’s primary mission is to ensure the stability of the international monetary system — the system of exchange rates and international payments that enables countries and their citizens to transact with each other.

• Today, its membership embraces 190 countries, with staff drawn from 150 nations.

• India is a founder member of the IMF.

• Its headquarters is situated in Washington, D.C. 

• The IMF is accountable to its member country governments. 

• The Board of Governors, the highest decision-making body of the IMF, consists of one governor and one alternate governor for each member country. The governor is appointed by the member country and is usually the minister of finance or the governor of the central bank. 

What kind of financial assistance does the IMF offer?

Unlike development banks, the IMF does not lend for specific projects. Instead, the IMF provides financial support to countries hit by crises to create breathing room as they implement policies that restore economic stability and growth. It also provides precautionary financing to help prevent crises. IMF lending is continuously refined to meet countries’ changing needs.

The IMF lending process is flexible. Countries that maintain a commitment to sound policies may be able to access resources with no or limited conditionality.

IMF lending instruments

The IMF has several lending instruments to meet the different needs and specific circumstances of its members. They are:

i) The Stand-by Arrangement (SBA) provides short-term financial assistance to countries facing balance of payments problems. Historically, it has been the IMF lending instrument most used by advanced and emerging market countries. Through the years, the SBA has been upgraded to be more flexible and responsive to countries’ needs.

ii) The Stand-by Credit Facility (SCF) provides financial assistance to low-income countries with short-term balance of payments needs. The SCF is one of the facilities under the Poverty Reduction and Growth Trust (PRGT).

iii) The Extended Fund Facility (EFF) provides financial assistance to countries facing serious medium-term balance of payments problems because of structural weaknesses that require time to address. To help countries implement medium-term structural reforms, the EFF offers longer program engagement and a longer repayment period.

iv) The Extended Credit Facility (ECF) provides medium-term financial assistance to low-income countries with protracted balance of payments problems. The ECF is one of the facilities under the Poverty Reduction and Growth Trust (PRGT).

v) The Rapid Financing Instrument (RFI) provides prompt financial assistance to any IMF member country facing an urgent balance of payments need. The RFI is one of the facilities under the General Resources Account (GRA) that provide financial support to countries, including in times of crisis.

vi) The Rapid Credit Facility (RCF) provides fast concessional financial assistance to low-income countries facing an urgent balance of payments need. The RCF is one of the facilities under the Poverty Reduction and Growth Trust (PRGT) that provide flexible financial support tailored to the diverse needs of low-income countries, including in times of crisis.

vii) The Flexible Credit Line (FCL) is designed to meet the demand for crisis-prevention and crisis-mitigation lending for countries with very strong policy frameworks and track records in economic performance.

viii) The Short-term Liquidity Line (SLL) is a liquidity backstop for members with very strong policy frameworks and fundamentals, who face potential, moderate, short-term liquidity needs because of external shocks that generate balance of payment difficulties. It aims to minimise the risk of shocks evolving into deeper crises and spilling over to other countries.

ix) The Precautionary and Liquidity Line (PLL) is designed to meet the liquidity needs of member countries with sound economic fundamentals but with some remaining vulnerabilities that preclude them from using the Flexible Credit Line (FCL).

x) The Resilience and Sustainability Facility (RSF) provides affordable long-term financing to countries undertaking reforms to reduce risks to prospective balance of payments stability, including those related to climate change and pandemic preparedness.

Previous Year’s Question

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

a. Asian Development Bank       

b. International Monetary Fund

c. United Nations Environment Programme Finance Initiative    

d. World Bank

Answer: b.

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