Navigating Sri Lanka’s rocky road to recovery

By Anoushka Vijesingh

Sri Lankafs economic crisis has been going on for some time. Years of policy missteps and a problematic growth model came to the fore with a debilitating foreign reserves crisis in early 2022. Families and firms suffer due to shortage of essential commodities. The precarious balance of payments situation has left little buffer to counter shocks from global markets. All this resulted in the peoplefs rejection of a regime that oversaw the economic collapse, an insurgency that lasted several months, and the installation of President Ranil Wickremesinghe under extraordinary circumstances in July. Since the governmentfs announcement of the suspension of foreign debt payments in April, discussions have progressed on a bailout ? an expanded funds facilitation program ? with the International Monetary Fund (IMF), and the finalization of an employee-level agreement (SLA). being given. In recent weeks, there has been a tendency for those in power to blame public protests as gchaosh and gunresth for delays in consolidating the IMF deal. This is not only insidious, but also not helpful in understanding the rocky road ahead.

Even once the SLA is in place, the IMF Executive Board will approve a program and release bailout funds only if it has eadequate financing assurancef. This means that Sri Lanka will have to secure certain agreements with major creditors (up to the level of comfort of the IMF) and the fundfs major shareholders such as the US will have to be convinced of the fair treatment of all Sri Lankan creditors. Until then, other multilaterals such as the World Bank and the Asian Development Bank will also refrain from lending new money. For Zambia, which defaulted in November 2020, the process took about eight months, from the conclusion of an SLA in December 2021 to a settlement with its bilateral creditor group (of which China was co-chaired) in July this year. . Clearly, Sri Lanka should quickly make appropriate progress on debt negotiations with private creditors (holders of international sovereign bonds and commercial debt) and bilateral creditors such as Japan, China and India, to convince the IMFfs executive board.

In this it will be important to get support from China. Chinese officials have sent hot and cold signals in the months since the loan pause was announced in April. While China has expressed support for Sri Lankafs talks with the IMF, it is yet to fully and publicly commit to engaging in talks with other bilateral lenders. Perhaps China, a relationship-based lender, is waiting for the new government to make new proposals at a higher level. Meanwhile, Sri Lankafs debt advisors ? Lazard and Clifford Chance ? will begin talks with private creditors holding sovereign bonds. Some of these are likely to be embroiled in legal disputes, the nature of which led Sri Lanka to unilaterally default in April.

Certainly, spending a few extra weeks on finalizing the SLA may not be a bad thing, if it helps to better ground the program in the current socio-political realities. Trying to coerce through a settlement that doesnft adequately appreciate the dramatic changes could jeopardize the programfs public acceptance and longevity. There are four key areas that the new administration needs to consider. First, the program with the IMF cannot focus solely on revenue-based fiscal consolidation (only, higher taxes); It also has to be dealt with on the spending side. There is a growing public demand for accountability of public finances, better debt management and combating politicization and corruption in government. These are no longer concerns limited to policy victories; They are shared throughout the society. Mis-prioritized public spending (for example, the dominance of military spending in the budget) has compromised investment in health, education and innovation. While higher taxes and a wider tax base are indeed necessary, peoplefs willingness to accept a tighter tax regime will improve when they see greater accountability on how revenue is spent.

Second, domestic political consensus on key reform areas must accompany any IMF programme. It is not just about esigning the point linef of the IMF agreement now, but also about ensuring smooth implementation in the years to come. The economic cost of letting narrow political leanings get in the way is enormous. The scale of the reforms required a consensus among political parties and major interest groups. It is encouraging that we have seen in recent weeks a group of lawmakers agree to advance a common minimum programme, with input from a range of stakeholders. It should gain more traction now to prevent the policy from backtracking later.

Third, policymaking should be more inclusive. One of the biggest governance errors of the deposed regime was its tendency towards island policy making. The Presidentfs COVID-19 Task Force was headed by a military commander, not a health professional or experienced civil servant. There was no input from people outside bureaucratic and military circles in the design and roll-out of COVID-19-era welfare payments. Poverty think tanks and civil society organizations that understand the impact on families, informal workers and vulnerable groups were not welcomed. A COVID-19 economic recovery task force had a handful of non-official members from a narrow section of the private sector and just one woman, a political appointee in a public agency. Incorrectly imposed fertilizer restrictions were reported by paediatricians and priests instead of those holding PhDs in agriculture and agro-economists. The Central Bankfs Monetary Board and the Monetary Policy Advisory Committee were reconstituted to exclude those with different views and to include those who shared the same economic and policy ideology of the government. The new administration should do the opposite: listen to societyfs more representative voices and allow for dissent and outside views in a structured manner.

Fourth, an honest and forward-looking picture needs to be painted. The new government needs to explain what policy steps are being taken, why and when, what will be the results and how these will help mitigate the economic crisis. What is needed is an honest dialogue with the electorate, where the government is with the people, and the public in turn feels that the government has its back.

To be sure, fully approving the IMF agreement from staff-level by the fundfs executive board has less to do with domestic politics and more to do with the progress of debt restructuring negotiations. Potential IMF financing is dependent on a fair and prompt renegotiation process with Sri Lankafs creditors (private and bilateral), to put the country on a path towards debt stability. But the future success of the IMF program, once approved, and overall reform within its scope may be determined by domestic politics and smart policymaking. Any attempt to pursue a reform program without a clear expression of its justification, expected results and measures to protect the vulnerable will be resisted by politicians and the public. Any attempt by Sri Lankan leaders to tighten their grip on society under the guise of intensifying the IMF program will most likely be met with resistance by a newly awakened and alert citizens. (The Hindu)

Anoushka Vijesingh is a Colombo-based economist and co-founder of the Center for a Smart Future, a public policy think tank.