IMF prescription

Friday 4th March, 2022

The government is coming under increasing pressure to ask the International Monetary Fund (IMF) for assistance. It is wary of doing so owing to the constricting conditions that IMF help usually comes with. It does not want to mend its ways, and is behaving like a dipsomaniac afflicted with cirrhosis refusing to receive medical treatment for fear of being asked to stop drinking. Not that the IMF has a magic potion that can cure all economic ills of this country, but the government has run out of options.

The IMF has already spoken, according to media reports. Its Executive Board has, in a very diplomatically-worded statement, which is a textbook example of euphemism, told the Sri Lankan government what needs to be done to save the country’s economy. Reading between the lines, one sees that the IMF has given the lie to the government’s claim that the current economic crisis is due to the Covid-19 pandemic. The IMF says inadequate external buffers and high risks to public debt sustainability had rendered Sri Lanka vulnerable before the onset of the pandemic; ‘large tax cuts’ in late 2019, worsened the situation. It has observed: “… annual fiscal deficits exceeded 10 percent of GDP in 2020 and 2021, due to the pre-pandemic tax cuts, weak revenue performance in the wake of the pandemic, and expenditure measures to combat the pandemic.”

The IMF’s contention runs counter to the Opposition’s claim that the deterioration of the economy began after the 2019 regime change; it says the Easter Sunday terrorist attacks in 2019 exacerbated the situation, the implication being that the economy had not been in good shape even before that tragedy.

The sting is said to be in the tail. The IMF has, in the final paragraph of its statement, told the Sri Lankan government what the latter obviously does not want to hear; it has called for renewed efforts on ‘growth-enhancing structural reforms, which Sri Lankans are not well disposed to traditionally.

Sri Lankans consider structural reforms as a cure worse than the disease because of their experience with such programmes previously. The IMF directors have also called for measures to improve the business and investment climate in Sri Lanka; this may be read as a call for action to improve Sri Lanka’s ease of doing business rankings to attract foreign investors. This, however, is a tall order, given the sheer number of politicians and bureaucrats seeking to have their palms greased by foreign investors.

The SLPP abhors structural reforms due to their political fallout. It is their short-term impact that usually dominate political debate, and the long-term gains resulting from them, if at all, tend to be dismissed as uncertain forecasts. What Sri Lanka has undergone in the name of structural reforms has strengthened the position of the opponents thereof. They have witnessed disastrous divestiture programmes which caused vital state assets to go for a song. Structural reforms are a worrisome proposition for the government, which is already scared of facing elections; it has unashamedly put off the local government polls, which were to be held this month.

Economists inform us that political parties with educated, urban, middle class supporters who are not dependent on social welfare as such are not averse to structural reforms unlike the political organisations that are dependent on not-so-educated people who are in the so-called protected segments of the economy and dependent on benefits. This may explain why the SLPP did not want to seek IMF help.

The IMF has basically asked the Sri Lankan government very diplomatically to accept structural reforms, allow the free float of the rupee while gradually unwinding capital flow management measures as conditions permit, curtail waste, do away with tax concessions, increase taxes and energy prices, remove impediments to business and investment, cautiously tread on the Colombo Port City project, make a commitment to good governance and, above all, fight corruption. In other words, the IMF has spelt out what it expects Sri Lanka to do in case the latter officially seeking the former’s assistance.