Daily Current Affairs : 2-December-2023

Sri Lanka has recently achieved an “agreement in principle” with India and the Paris Club, including Japan, marking a crucial step towards resolving its economic challenges. This agreement lays the groundwork for a comprehensive debt treatment plan, aiming to pave the way for the release of the next tranche of the International Monetary Fund’s (IMF) nearly $3 billion recovery package for Sri Lanka.

The Economic Crisis in Sri Lanka:

Sri Lanka’s current economic turmoil stems from a combination of factors, creating a challenging scenario that necessitated a comprehensive loan restructuring. The key contributors to this crisis include:

  • High Government Debt: Sri Lanka grapples with elevated levels of government debt, contributing significantly to its economic challenges.
  • Large Trade Deficit: The nation faces a substantial trade deficit, impacting its overall economic stability and resilience.
  • Weak Foreign Exchange Reserves: Insufficient foreign exchange reserves add to the economic woes, limiting the country’s capacity to navigate financial challenges.
  • Declining Economic Growth: A downward trend in economic growth further exacerbates the crisis, necessitating urgent interventions.
The Role of the Paris Club:

Established in 1956 with its headquarters in Paris, France, the Paris Club consists of officials from major creditor countries. The primary objective of this group is to collaboratively address and resolve payment difficulties faced by debtor nations. In the context of Sri Lanka, the Paris Club has played a crucial role by providing financial assurances to the International Monetary Fund regarding Sri Lanka’s debt.

Objective of the Paris Club:

The Paris Club’s primary mission is to identify coordinated and sustainable solutions for countries unable to meet their obligations on bilateral loans. By working towards debt relief, the Paris Club aims to offer a lifeline to nations in financial distress, promoting stability and sustainable economic recovery.

Important Points:
  • Agreement in Principle:
    • Sri Lanka has reached an “agreement in principle” with India and the Paris Club, including Japan.
    • Signifies a pivotal step towards resolving the country’s economic challenges.
  • IMF Recovery Package:
    • Aims to facilitate the release of the next tranche of the nearly $3 billion recovery package from the International Monetary Fund (IMF).
    • Highlights the importance of international cooperation in supporting Sri Lanka’s economic recovery.
  • Economic Crisis Factors:
    • High levels of government debt contribute significantly to Sri Lanka’s economic challenges.
    • A substantial trade deficit impacts overall economic stability.
    • Weak foreign exchange reserves limit the country’s financial resilience.
    • Declining economic growth adds urgency to the need for interventions.
  • Paris Club’s Role:
    • Established in 1956, headquartered in Paris, France.
    • Comprises officials from major creditor countries.
    • Provides financial assurances to the IMF on Sri Lanka’s debt.
  • Paris Club Objective:
    • Aims to find coordinated and sustainable solutions for payment difficulties faced by debtor countries.
    • Works towards offering debt relief to nations unable to meet obligations on bilateral loans.
    • Supports stability and sustainable economic recovery.
Why In News

Sri Lanka has successfully reached an “agreement in principle” with India and the Paris Club group of creditors, including Japan, on a comprehensive debt treatment plan aimed at fostering sustainable economic recovery and financial stability.

MCQs about Paris Club Agreement and IMF Support

  1. What is the primary aim of the agreement between Sri Lanka, India, and the Paris Club?
    A. Increase government debt
    B. Facilitate the release of the next IMF tranche
    C. Establish a new trade deficit
    D. Decrease foreign exchange reserves
    Correct Answer: B. Facilitate the release of the next IMF tranche
    Explanation: The agreement aims to pave the way for the release of the next tranche of the IMF’s nearly $3 billion recovery package for Sri Lanka.
  2. What are the key factors contributing to Sri Lanka’s current economic crisis?
    A. High levels of government debt and strong foreign exchange reserves
    B. Large trade surplus and declining economic growth
    C. Weak foreign exchange reserves and a substantial trade deficit
    D. Increasing economic growth and reduced government debt
    Correct Answer: C. Weak foreign exchange reserves and a substantial trade deficit
    Explanation: The economic crisis is a result of weak foreign exchange reserves, a substantial trade deficit, and other contributing factors.
  3. What is the primary objective of the Paris Club in the context of Sri Lanka’s debt?
    A. Increase bilateral loans
    B. Provide financial assurances to Sri Lanka
    C. Coordinate solutions for debtor countries’ payment difficulties
    D. Decrease the International Monetary Fund’s involvement
    Correct Answer: C. Coordinate solutions for debtor countries’ payment difficulties
    Explanation: The Paris Club’s main objective is to find coordinated and sustainable solutions for payment difficulties faced by debtor countries.
  4. What is the significance of declining economic growth in Sri Lanka’s current situation?
    A. It indicates a strong and stable economy
    B. It adds urgency to the need for interventions
    C. It leads to an increase in foreign exchange reserves
    D. It has no impact on the economic crisis
    Correct Answer: B. It adds urgency to the need for interventions
    Explanation: Declining economic growth exacerbates the economic crisis, emphasizing the need for urgent interventions to spur recovery.

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