Sri Lanka puts on brave face before IMF bailout

March 19, 2009 (LBO) – Sri Lanka is putting on a brave face after being forced into an International Monetary Fund bailout having spent its way into trouble and busted up billions of dollars of foreign reserves on an ill-fated peg defence exercise. “This is a special measure taken by the IMF to help countries cope with the global economic crisis. It must not be confused with the IMF bailout.

“This is an emergency measure which has been expressly sought by developing countries and agreed to by the IMF board of governors.”

IMF has several facilities such as the short term liquidity facility, which are for countries which require ‘no policy adjustments’ which is IMFspeak for well-managed countries, as well as the exogenous shocks facility, which require some policy adjustments.

But Sri Lanka has made a formal request for a stand by arrangement, which is the most widely used instrument to get errant countries that have driven themselves into balance of payments crises, back on track.

Humble Pie

In 2004 Sri Lanka jettisoned an IMF backed policy framework and embarked on a spending spree and money printing binge saying cutting budget deficits was ‘old fashioned’.

Unlike India, which cut deficits in the ‘good’ years