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IMF Team in Sri Lanka for Bailout Talks Amid Deepening Economic Crisis   

Members of Inter University Students' Federation shout slogans against Sri Lanka's President Gotabaya Rajapaksa demanding him to step down, amid the country's economic crisis, in Colombo, Sri Lanka, June 20, 2022.

A team from the International Monetary Fund is in Sri Lanka for crucial bailout negotiations with the crisis-ridden country that is left with virtually no foreign exchange to import food, fuel and medicines.

The talks began on Monday as schools and government offices shut down for two weeks and switched to working online to conserve fast depleting fuel supplies.

"We reaffirm our commitment to support Sri Lanka at this difficult time, in line with the IMF’s policies," the lender said in a statement.

The nine-member team has met Prime Minister Ranil Wickremesinghe and will be in the country for 10 days.

Economists say talks with the IMF are critical for the country as it faces virtual bankruptcy. Wickremesinghe told parliament earlier this month that Sri Lanka needs at least $5 billion to meet essential imports for the rest of the year. Earlier, the government had suspended its repayment of foreign debt.

The economic situation has been exacerbated by a political crisis that has led to months of protests demanding that President Gotabaya Rajapaksa step down. The meltdown is blamed on mismanagement by the Rajapaksa family that held many crucial positions in the government, and the COVID-19 pandemic that ended crucial tourism earnings.

“For Sri Lanka, the IMF is the only game in town; there is no other alternative,” said Murtaza Jafferjee, chairman of the Advocata Institute, a research organization based in Colombo. “If the talks are successful, it would give confidence to other investors that Sri Lanka is on the path to economic recovery and open the door for creditors like the World Bank to resume lending.”

While the government is hoping to fast track a preliminary agreement with the IMF, it could take months to finalize a relief package. Economists say it will depend on the country taking critical steps that will increase hardships in the short term such as raising interest rates and taxes to lower the fiscal deficit and making the exchange rate flexible.

“I don’t expect a final agreement until the end of the year. Until then we just have to hobble along,” says economist Jafferjee. “There is no option.”

The severe shortage of fuel supplies has brought economic activity to a virtual standstill — factories have had to curtail operations and snaking lines outside fuel stations have seen people wait for up to 16 hours to get fuel. That has led to sporadic unrest – on Saturday, troops fired shots in the air at a gas station in the town of Visuvamadu to control crowds that clashed with police when fuel ran out, according to authorities.

Armed police and troops have been deployed to guard fuel stations in Sri Lanka for months.

Power and Energy Minister Kanchana Wijisekera has warned that the existing stock of diesel and gasoline could run out soon. He said last week that the government had not received any fresh tenders for fuel because suppliers were deterred by outstanding payments that amount to about $725 million.

Amid the crisis, Sri Lanka has also reached out to multiple countries including several Russian companies to purchase crude oil imports for the coming months, Wijisekera said last week. Economists say that the hope is to get Russian oil at a discount with credit terms at a time when the country faces extreme hardships.

While Western countries have imposed sanctions on Russia, Sri Lanka has remained neutral on the war in Ukraine, like some other South Asian nations.

As the tiny country of 22 million also faces an impending food crisis, Prime Minister Wickremesinghe has asked members of parliament to take charge of food security programs in their districts.

The food shortages have prompted some unusual initiatives. Last week, the government asked officials to work a four-day week and take a day off to grow food in their backyards “as a solution to the food shortage that is expected to occur in the future,” according to a government statement.

“The humanitarian situation is worsening,” says Jehan Perera, director of the non-governmental advocacy group, the National Peace Council in Colombo. “Food is available at a very high price, but many people don’t have money because they have no earnings, so they cannot buy it. So yes, it is bad times.”

The United Nations' children's agency has said that 70% of Sri Lankan households had already reduced food consumption and as many as one in two children required some form of emergency assistance.