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

WorldAsiaSri Lanka needs institutional changes for long-term debt sustainability, says professor
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Protesters came to Sri Lanka’s capital Colombo on Monday amid growing frustration over rising prices, power shortages and prolonged power cuts. Angry protesters demanded the resignation of President Gotabaya Rajapaksa and his brother, Prime Minister Mahinda Rajapaksa.

Budhika Weerasinghe | Bloomberg | Getty Images

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

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The South Asian country is grappling with its worst financial crisis in decades $2.9 billion IMF loan needed to be unlocked This was agreed in September, so that its public finances could be fixed.

“Unless you change the institutions that govern these countries and the rules of the game, they will always remain in the same position…the position they have been in for a long time,” said Hanke, now a professor of applied sciences at Johns Hopkins. University of Economics told CNBC’s “Squawk Box Asia” on Thursday.

“In fact, most of the personalities involved at the high level in Sri Lanka are exactly as they have been over the years. So nothing has changed.”

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

Hanke, who was previously an economic advisor to former US President Ronald Reagan, also doubted whether the IMF bailout would help Sri Lanka’s troubled economy in the long term. He told that the country has gone to the fund several times for relief.

“You have to remember that we have a country where there have been 16 IMF programs since 1965 and all of them have failed,” he said. “You get temporary relief in anticipation of a bailout. But in the long run … none of these IMF programs work.”

In September, the IMF outlined a series of steps it wanted Sri Lanka’s government to implement before loan approval, including major tax reform.

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

The IMF declined to comment to CNBC.

China support

Wickremesinghe said on Tuesday that China had given crucial debt restructuring assurances that could pave the way for final approval of the IMF’s four-year bailout of $2.9 billion.

“We received the letter of financial assurance from China’s Exim Bank last night. Accordingly, on the same night, the Governor of the Central Bank and I signed the letter of agreement and forwarded it to the IMF. Our duties are now performed,” he told parliamentAccording to the transcript in the local media.

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

In the next tweet, the President said that he has spoken to IMF Managing Director Kristalina Georgieva and US Treasury Secretary Janet Yellen on the matter.

He also mentioned that he is expecting financial assistance from the World Bank and the Asian Development Bank as soon as the IMF agreement is in place.

In its readout, US Treasury Department said: “During their meeting, Secretary Yellen expressed support for Sri Lanka’s steps towards an IMF-backed program to advance economic recovery and achieve a strong and sustainable recovery.”

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

How Sri Lanka's economy collapsed

IMF’s Georgieva also lauded Sri Lanka’s progress in resolving its financial situation.,

“I welcome the progress made by the Sri Lankan authorities in taking decisive policy action and obtaining financial assurances from all its major creditors, including China, India and the Paris Club,” she wrote in a tweet.

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

Still, JHU’s Hanke said the IMF’s programs did not go down well with the Sri Lankan people.

“You’ve got the IMF out there trying to manage something,” Hanke said. “The International Monetary Fund … becomes very unpopular because they are going to try to introduce and ram through these old institutions that they have all kinds of things in Sri Lanka that Sri Lankans will not like.”

During his speech on Tuesday, the Sri Lankan President underlined, “Unlike on the previous 16 occasions, there is no room for failure to complete each and every task agreed with the IMF.”

Wickremesinghe said, “The settlement with the IMF is of particular importance to restore our economy and at present no alternative path can be seen.”

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