The International Finance Corporation (IFC) has announced that it will offer Sri Lanka a $400 million cross-currency swap facility to fund essential imports. The funds will provide a much-needed foreign exchange cushion for Sri Lanka, which is currently grappling with its worst financial crisis in over seven decades, partly triggered by a severe shortage of dollars. Three private banks, which together handle over 30% of Sri Lanka’s remittances and exports, will receive the facility to fund essential imports such as medicine, food, and fertiliser. The IFC said that it also plans to provide further support to client banks with other long-term funding and advisory services in the future.
Sri Lanka’s economy is estimated to have contracted by 9.2% in 2022 and is expected to shrink a further 4.2% in 2023, according to World Bank data. The country signed a preliminary agreement with the International Monetary Fund (IMF) for a $2.9 billion bailout last September, but it must first put its debt on a sustainable repayment track before the funds can be disbursed. The IFC’s facility is expected to boost confidence in the investor community and attract fresh capital inflows to support the Sri Lankan economy, said Joon Young Park, IFC’s Portfolio Manager for South Asia.
Sri Lanka’s financial crisis has been compounded by the COVID-19 pandemic, which has hit the country hard. The government’s response to the crisis has been criticised for its slow and inadequate measures, which have led to a shortage of essential goods and services. The country’s currency has also depreciated significantly, making it difficult to pay for imports and service foreign debt.
The IFC’s facility is expected to provide some relief to Sri Lanka’s struggling economy, but it is not a long-term solution to the country’s financial problems. The government must take decisive action to address the underlying issues that have led to the current crisis, including reducing the budget deficit, improving tax collection, and implementing structural reforms to boost economic growth. Failure to take these steps could lead to further economic decline and a deepening of the crisis.