Why in the News?

SRI Lanka’s Cabinet has approved a new economic law to stabilize its debt-to-GDP ratio that will cover key targets set by the International Monetary Fund (IMF).

• The debt-to-GDP ratio measures the proportion of a country’s national debt to its gross domestic product.
• According to the World Bank, the countries whose debt-to-GDP ratios exceed 77% for prolonged periods experience significant slowdowns in economic growth.

What are the IMF Targets?

• • The IMF has various targets and initiatives aimed at achieving sustainable economic growth and prosperity for its member countries.
  • It includes promoting financial stability, monetary cooperation, and transparency in economic policies to enhance productivity, job creation, and economic well-being.

• Indian Scenario:

• • • India has not taken any financial assistance from the IMF since 1993.
    • India’s current quota in the IMF is SDR (Special Drawing Rights) 5,821.5 million, making it the 13th largest quota-holding country at IMF and giving it shareholdings of 2.44%.

• For Sri Lanka:

• • The IMF targets Sri Lanka to reduce its debt to gross domestic product (GDP) ratio to 95% by 2030.
  • Another target set by the IMF is to reduce debt servicing costs to 4.5% of GDP. It means Sri Lanka needs to focus on managing the costs associated with servicing it’s debt obligations, aiming to make it more sustainable and manageable in the long term.

How will the debt-to-GDP ratio be reduced?   

• Fiscal Discipline: Sri Lanka may need to implement measures to improve fiscal discipline, such as reducing government Expenditure, increasing Tax revenue, and narrowing Budget Deficits.
• Debt Restructuring: Sri Lanka can explore negotiating with creditors to extend debt maturities, reduce interest rates, or reprofile debt payments.
• Revenue Enhancement: The government could focus on enhancing revenue generation through tax reforms, improved tax administration, and efforts to broaden the tax base.
• Economic Growth: Promoting economic growth is essential for reducing the debt-to-GDP ratio over the long term. Sri Lanka could implement policies to stimulate investment, boost productivity, and enhance competitiveness, leading to higher GDP growth rates and a more sustainable debt trajectory.

What does India do presently to reduce its debt-to-GDP ratio?

• Targeted Reduction: According to a research paper by the Reserve Bank of India (RBI), the government aims to lower the general government debt-GDP ratio to 73.4% by 2030-31. This target is approximately 5% points lower than the trajectory projected by the IMF, indicating ambitious yet achievable goals.
• Promotes Fiscal Space: The Indian Central Bank – RBI emphasized reducing debt burdens to free up fiscal space for new investments, particularly in critical areas like the green transition. This suggests a strategic focus on investing in sustainable and environmentally friendly initiatives.
• Aligning with IMF: The IMF projects a positive trend in India’s debt reduction efforts, forecasting a decline in government debt from 81% of GDP in 2022 to 80.5% in 2028. This indicates that India’s debt reduction measures are consistent with international expectations and standards.

Conclusion: Focus on enhancing revenue generation through Comprehensive Tax reforms, improved tax compliance, and efforts to broaden the tax base is needed. Secondly, rationalizing Tax revenues can provide additional resources to finance government expenditures without relying heavily on borrowing, thus reducing the debt-to-GDP ratio.

Mains PYQ:

Q The World Bank and the IMF, collectively known as the Bretton Woods Institutions, are the two inter-governmental pillars supporting the structure of the world’s economic and financial order. Superficially, the World Bank and the IMF exhibit many common characteristics, yet their role, functions and mandates are distinctly different. Elucidate. (UPSC IAS/2013)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now