Sri Lanka needs institutional changes for long-term debt sustainability, says the professor

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Deep frustration over inflation, shortages and prolonged power cuts led to demonstrators in the Sri Lankan capital, Colombo, on Monday. Angry protesters called for the resignation of President Gotabaya Rajapaksa and his brother, Prime Minister Mahinda Rajapaksa.

Buddhist Weerasinghe | Bloomberg | Getty Images

Sri Lanka needs institutional reforms to achieve long-term debt sustainability, said Steve Hanke, who played a key role in establishing new currency regimes in emerging markets such as Argentina and Montenegro.

The South Asian country is grappling with its worst financial crisis in decades and must resolve a $2.9 billion IMF loan approved in September, to get its public finances in order.

“If you don’t change the institutions and the rules of the game that govern these countries, they will always remain in the same position … economics at Johns Hopkins University, to CNBC’s “Squawk Box Asia” Thursday.

“In fact, most of the people involved in Sri Lanka are at the top level just as they have been for years. So nothing has changed.”

Sri Lanka has been struggling with severe shortages of food, medicine, fuel and electricity since last year. This has led to angry protests that forced the then President Gotabaya Rajapaksa to flee the country and resign. The country’s lawmakers elected six-time Prime Minister Ranil Wickremesinghe as president last July as a replacement.

Sri Lanka crisis: None of these IMF programs are working, says Steve Hanke

Hanke, a former economic adviser to former US President Ronald Reagan, also doubted whether the IMF bailout would help Sri Lanka’s struggling economy in the long run. He pointed out that the country has gone to the fund several times in his hand for relief.

“You have to remember that we have a country that has had 16 IMF programs since 1965 and they have all failed,” he said. “You get temporary relief with the expectation of financial aid. But in the long run … none of these IMF programs will work.”

In September, the IMF outlined a series of measures it wanted the Sri Lankan government to implement before the loan was approved, which included major tax reforms.

“Debt relief from Sri Lanka’s creditors and additional funding from multilateral partners will be needed to ensure debt sustainability and close financing gaps,” the fund said at the time.

The IMF declined to comment to CNBC.

Support China

On Tuesday, Wickremesinghe said China has made crucial debt restructuring commitments that could pave the way for final approval of the IMF’s $2.9 billion four-year bailout.

“We received the financial guarantee letter from the Exim Bank of China last night. So, on the same night, myself and the Governor of the Central Bank signed the letter of agreement and forwarded it to the IMF. A- now our duties are fulfilled,” he told the parliament, according to the transcript in the local media.

“I hope that by the end of this month, by the fourth week, the IMF will do its duty.”

In a follow-up tweet, the president said he has spoken with IMF Managing Director Kristalina Georgieva and US Treasury Secretary Janet Yellen about this issue.

He also said that he expects financial support from the World Bank and the Asian Development Bank to start arriving soon after the IMF agreement is reached.

In its reading, the US Treasury Department said: “During their meeting, Secretary Yellen expressed support for Sri Lanka’s steps towards an IMF-supported program to promote economic reform and a strong and sustainable recovery achievement “

“The Secretary welcomed Sri Lanka’s commitments to transparency and comparable treatment for all bilateral official and private creditors.”

The collapse of Sri Lanka's economy

Georgieva also praised the IMF Sri Lanka for their progress in solving their financial situation.

“I welcome the progress made by the Sri Lankan authorities in taking decisive policy actions and obtaining financial guarantees from their major creditors, including China, India & Club Paris,” she wrote in a tweet on Tuesday.

“Look forward to presenting the IMF-backed program to our Executive Board on March 20.”

However, JHU’s Hanke said IMF programs do not tend to go down well with the Sri Lankan people.

“You get the IMF in there trying to manage something,” Hanke said. “The IMF tends to be … very unpopular because they are going to try to bring in these old institutions that they have in Sri Lanka and run them through all sorts of things which the Sri Lankans don’t like.”

In his speech on Tuesday, the president of Sri Lanka emphasized that “there is no room for failure in carrying out all the actions agreed by the IMF, unlike the 16 previous times.”

“The agreement with the IMF is very important to restore our economy, and there is no other way in sight at the moment,” said Wickremesinghe.

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