There is no escaping the fact that Sri Lanka is facing a dire and unprecedented economic crisis. There are no easy answers or quick fixes for emerging from this economic malaise unscathed. A collective determination and a spirit of sacrifice will be needed in this long and painful journey towards economic redemption.
It is also clear that we cannot climb out of this quagmire without external help, since our own foreign reserves have hit the nadir. Covid-19 certainly played a part in our slide into economic oblivion, but economic mismanagement played an even more significant role. The prescription for recovery will be rather expensive in more ways than one.
The International Monetary Fund (IMF) has summarised the present economic situation as follows: “Sri Lanka has been facing an acute crisis. Vulnerabilities have grown owing to inadequate external buffers and an unsustainable public debt dynamic. The April debt moratorium led to Sri Lanka defaulting on its external obligations, and a critically low level of foreign reserves has hampered the import of essential goods, including fuel, further impeding economic activity. The economy is expected to contract by 8.7 percent in 2022 and inflation recently exceeded 60 percent. The impact has been disproportionately borne by the poor and vulnerable.”
As the first embers of the economic crisis ignited last year, many economists advised the then Government to hold talks with the International Monetary Fund (IMF) to seek a bailout package. There is no shame in going for an IMF package – Sri Lanka itself has done it around 16 times, while countries that are more developed and advanced than Sri Lanka have received a lifeline from this international lending agency. Yet, the previous Central Bank Governor was adamant that Sri Lanka should not seek IMF help.
By the time former President Gotabaya Rajapaksa realised that Sri Lanka probably cannot survive without IMF assistance at this particular stage, it was almost too late. In the end, he had to pay a very heavy price personally and politically for the delay in seeking an IMF lifeline.
It is in this context that all Sri Lankans must be thankful to President Ranil Wickremesinghe and Central Bank Governor Dr. Nandalal Weerasinghe for expediting negotiations with the IMF, which has now reached a Staff Level Agreement (SLA) with Sri Lanka for a US$ 2.9 billion Extended Fund Facility (EFF) spread over four years. This is good news from every perspective, as Sri Lanka’s economy badly needs an injection of capital to stay afloat.
According to the IMF, the objectives of Sri Lanka’s new Fund-supported program are to restore macroeconomic stability and debt sustainability, while safeguarding financial stability, protecting the vulnerable, and stepping up structural reforms to address corruption vulnerabilities and unlock Sri Lanka’s growth potential.
But there is no such thing as a free lunch and this is no handout in the conventional sense of the word. We have to work for it and indeed, some of the reforms proposed by the IMF may not be popular. But this is no popularity contest and could be our last chance to put many economic fundamentals on the correct track, as envisaged by the IMF under seven key guidelines.
First, the IMF has pointed out the need for tax reform. Sri Lanka has a very low direct tax base and the recent Budget proposal to open a Tax File for all individuals over 18 is a step in the right direction. The Government should ideally aim to reduce indirect taxes such as VAT and increase the number of income tax payers. In the second category, the IMF has touched on subsidies, which are no longer viable under the current economic conditions.
The Government took the correct decision to increase power and fuel prices, because the Treasury cannot afford to bridge the gap between actual and consumer prices any longer. The kerosene price hike may be seen as being particularly harsh, but the Government is planning to provide concessions to the fisheries and plantation communities, a measure which the IMF itself has advocated as part of the proposed social safety net for certain segments of society. That is incidentally the third plank of the IMF program.
The agency has also advocated a New Central Bank Act to give it more autonomy. If this had been done earlier, the Bank could have been able to ward off political interference in its work and done more to save the economy. The IMF has also called for rebuilding foreign reserves through restoring a market-determined and flexible exchange rate, supported by the comprehensive policy package under the program. Immense damage was done to the economy by artificially holding on to a predetermined exchange rate at the behest of previous Governments. This should now become a thing of the past.
The IMF has also recommended upgrading financial sector safety nets and regulatory standards with a revised Banking Act, which is rather timely given the present volatility in the banking sector. Last but not least, the IMF has stressed the need for tackling corruption in State and private sectors.
Corruption at all levels is a cancer that has retarded the country’s growth for the past 74 years since independence, as monies earmarked for development and social welfare have mysteriously vanished into thin air or rather into bank accounts abroad. Indeed, the Government must seek the intervention of the World Bank’s Stolen Assets Recovery (STAR) program to recover these funds. Transparency in Government financial transactions and tenders, as cited by the IMF in its final core component of the EFF program, is also essential. If we get all these factors right, the future could be much more promising.