IMF Emergency Aid via Rapid Financing Instrument

Why in News ?

The International Monetary Fund (IMF) has approved USD 206 million in emergency financing for Sri Lanka under its Rapid Financing Instrument (RFI) to address urgent balance of payments needs arising from the catastrophic Cyclone Ditwah.

Background & Context

Sri Lanka has faced recurrent economic and climatic shocks in recent years, severely straining its public finances, foreign exchange reserves, and balance of payments. Natural disasters such as cyclones exacerbate these vulnerabilities by disrupting economic activity, damaging infrastructure, and increasing import dependence for relief and reconstruction.

In this context, IMF emergency financing instruments play a critical role in providing swift liquidity support to affected countries without the delays associated with full-fledged adjustment programmes.

Rapid Financing Instrument (RFI): Overview

The Rapid Financing Instrument is an IMF facility designed to provide quick financial assistance to member countries facing urgent balance of payments needs.

• Available to all IMF member countries
• Intended for situations requiring rapid disbursement
• Operates under the General Resources Account (GRA)

Objectives of the Rapid Financing Instrument

• Address immediate foreign exchange shortages
• Support countries affected by:
  • Natural disasters
  • Exogenous shocks
  • Domestic instability
  • Fragility and crises
• Prevent escalation into deeper macroeconomic crises

Types of Rapid Financing Instrument

1. Regular Window

• For urgent balance of payments needs caused by:
  • Domestic instability
  • Exogenous economic shocks
  • Fragility or emergencies
• Access Limits:
  • Up to 50% of quota per year
  • Up to 100% of quota on a cumulative basis

2. Large Natural Disaster Window

• Applicable when:
  • Damage from a natural disaster equals or exceeds 20% of GDP
  • Designed for severe disaster-related shocks
• Access Limits:
  • Up to 80% of quota per year
  • Up to 133.33% of quota on a cumulative basis

Conditionality under the RFI

• No ex-post program-based conditionality
• No requirement for:
  • Structural reform benchmarks
  • Periodic programme reviews
  • Prior actions may apply in certain cases
• Recipient country must commit to:
  • Policies aimed at resolving underlying balance of payments problems
  • Transparency and appropriate use of funds

Significance of RFI Support for Sri Lanka

• Provides immediate liquidity for disaster response and recovery
• Helps stabilise foreign exchange reserves
• Prevents further macroeconomic and external sector stress
• Complements longer-term economic reform and recovery efforts

Broader Implications

• Highlights IMF’s role as a global financial safety net
• Demonstrates the importance of climate-resilient financing mechanisms
• Reflects growing linkage between:
  • Climate disasters
  • External sector vulnerability
  • Global financial stability

Relevance for India and the Region

• South Asia is highly vulnerable to climate-induced disasters
• IMF emergency instruments may become increasingly relevant
• Stability in neighbouring economies is vital for:
  • Regional trade
  • Financial stability
  • Humanitarian cooperation