Having Got IMF Facility, Sri Lanka Is Up Against Tougher Challenges – Analysis
Financial reforms and restructuring of the public sector remain to be accepted by a people who are used to a very different system.
On Monday, Sri Lanka received the IMF Executive Board’s approval for the Extended Fund Facility (EEF) – a four-year US$ 3 billion program to restore macroeconomic stability and debt sustainability while protecting vulnerable groups and safeguarding the country’s financial system.
But the financial reforms and restructuring of the public sector to be carried out are still to be accepted by a population that is used to a very different system that has been in place for decades.
According to the government, the EFF program will allow Sri Lanka to access financing of up to US$ 7 billion from the IMF, International Financial Institutions (IFIs) and multilateral organizations. Disbursement of the first tranche under this program is expected to take place in the coming days.
On April 12, 2022, Sri Lanka declared that it was defaulting. Its overall loan external burden was US$ 50 billion at that time. The EEF was secured after months of negotiations. While the private creditors posed one kind of problem (with a few going to court), one of the principal bilateral creditors, China, was playing hard to get. On the other hand, other creditors insisted that China had to be on board on the same terms as they would be. However, eventually, China gave the required financial assurances for the IMF to give the nod to release US$ 3 billion over the next four years.
President Ranil Wickremesinghe declared that he is committed to ushering in prudent fiscal management, an ambitious reform agenda, rooting out corruption, ensuring debt sustainability and making Sri Lanka an attractive destination for foreign investment.
Getting the IMF’s facility is one thing but meeting its conditions is quite another, given the innate resistance to reform in an entrenched political and governmental system, a bloated and inefficient public sector with deep roots in history, a population used to heavy subsidies and freebies, and the presence of powerful trade unions having sway over both blue-collar workers and white-collar professionals.
Rationalization and restructuring are therefore not easy. Privatization on any meaningful scale is almost out of the question.
Furthermore, the IMF had set tough goals. These are: (1) the reduction of the ratio of public debt to GDP to below 95% by 2032; (2) the bringing down of the annual gross financing needs to below 13% of GDP on an average between 2027-2032; (3) the scaling down of the annual foreign currency debt service to below 4. 5 % of GDP every year between 2027-2032; (4) the closing of the external financing gap.
The Wickremesinghe government has been making significant efforts to shore up its finances by rationalizing imports and increasing taxes despite strike actions and daily agitations. While the population is meeting price hikes by curbing the propensity to over-spend, the prospect of privatization or restructuring of the public sector institutions is worrying their employees who run into lakhs. For decades public sector jobs had been doled out to meet political needs and overtime and other allowances were liberally doled out to keep the peace at the workplace.
However, except for the avowed left parties, other parties have indicated that they will not oppose restructuring if carried out without retrenchment. Wickremesinghe’s main prop in parliament, the Sri Lanka Podujana Peramuna (SLPP) has said that restructuring without privatization, is the need of the hour.
On IMF’s insistence, the government has introduced a controversial Central Bank reform bill to make the bank independent of political manipulation in matters of monetary policy. But it is presently under challenge in the Supreme Court. There are people who say that nothing should be kept away from the reach of politics or political power as Sri Lanka is a democracy.
One of the petitioners, with close links with the SLPP, has argued that the bill will take away parliament’s constitutional power over public finance. But Wickremesinghe’s supporters said that the Central Bank would get autonomy only in matters of monetary policy and not on fiscal policy as is the practice in every democracy. The Central Bank Governor Dr.Nandalal Weerasinghe granted that there are some flaws in the bill but added that these could be corrected as it journeys through parliamentary procedure.
However, critics of the IMF program point out that it envisages (1) a contracting the economy (2) free-float of exchange rates (3) interest rate hikes (4) energy Pricing (5) increase in taxes across all segments. (6) the end goal of a primary account surplus of 2.3% of GDP by 2025.
In an article in Daily Mirror Dr.Kusum Wijetilleke maintains that the austerity-driven IMF programs are notorious for their impact on the poorest. He quotes Indian economist Dr. Jayati Ghosh who wondered how an economy in recession could achieve a primary budget surplus in three years. But Ghosh is countered by Dr. Sharmini Coorey, a former Senior Official of the IMF, who said that the longer the fiscal adjustment takes, the longer the people will suffer under harsh inflation.
But the main argument of the opposition parties in Sri Lanka is that for any harsh program to be accepted by the people, the government should have a popular mandate. The Wickremesinghe government does not have one. It rests on the support of the SLPP which itself had lost the confidence of the people, though it still dominates parliament in the absence of fresh elections. The opposition wants at least the Local Government elections to be held to test the will of the people. But Wickremesinghe has said that the country cannot spend billions on elections under the present financial conditions.
Leader of the Opposition, Sajith Premadasa, has suggested a Keynesian ‘New Deal’ marked by government projects to generate income and demand. On the issue of protecting labor, “New Deal” US President F.D. Roosevelt said: “Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much higher consideration. Now, this means that our government, National and State, must be freed from the sinister influence or control of special interests. Exactly as the special interests of cotton and slavery threatened our political integrity before the Civil War, so now the great special business interests too often control and corrupt the men and methods of government for their own profit. We must drive the special interests out of politics.”
However, Wijetilleke adds that Sri Lankan progressives must recognize the need to reform the State-Owned Enterprises (SOEs). But he cautions against efforts to integrate Sri Lanka into Global Production Networks (GPNs). To be meaningful, GPNs should be full-fledged manufacturing units of high-technology components and not any component. But high-technology investments require expertise from engineering to mathematics and IT plus entire systems dedicated to research, he adds. Sri Lanka is still to acquire these capacities.
Neoliberal regimes have created wealth. But what has been lacking is a redistribution of wealth, Wijetilleke says. The poorest people in Sri Lanka, who are farthest from the seats of power, will inevitably bear the brunt of the government’s policy failures. But while the reforms are necessary, given the current economic context and lack of cash flows, why has the government not engaged workers’ organizations to generate some acceptance of the reforms.
“Why not use the power of the trade unions to create a transactional dialogue, negotiate the price of reforms and show that while workers suffer, the political class and bureaucracy that allowed this to happen are also being held accountable? Far from being political witch-hunts, this would instill a perception of equitable treatment,” Wijetilleke argues.