Navigating Sri Lanka’s Rocky Road to Recovery – The Hindu | Vette Leader

Sri Lanka’s economic crisis has been smoldering for some time. Years of policy missteps and a problematic growth model came to a head in early 2022 with a crippling foreign exchange reserve crisis. The lack of essential goods harms families and businesses. A precarious balance of payments situation left little buffer to absorb the shocks emanating from global markets. All of this culminated in rejection of the regime, which oversaw the economic collapse, an insurgency that lasted many months, and the July popular inauguration of President Ranil Wickremasinghe in extraordinary circumstances. Since the government announced in April that it would suspend external debt payments, talks with the International Monetary Fund (IMF) on a bailout package — an Enhanced Fund Facility program — have advanced and a staff agreement (SLA) is being finalized. In recent weeks there has been a tendency for those in power to blame popular protest as “anarchy” and “unrest” for the delay in consolidating an IMF deal. Not only is this disingenuous, it is also not helpful in understanding the rocky road ahead.

Along the road

Even when the SLA is complete, the IMF’s Executive Board will not approve a program and release bailout funds until it has “adequate funding assurances.” This means that Sri Lanka would have to enter into some agreements with major creditors (as required by the IMF) and the fund’s largest shareholders, such as the US, would have to rely on Sri Lanka’s fair treatment of all 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, this process took almost eight months, from the conclusion of an SLA in December 2021 to the agreement of its bilateral group of creditors (co-chaired by China) in July this year. Obviously, Sri Lanka needs to make decent progress quickly in debt negotiations – with private creditors (holders of international government bonds and commercial credit) and bilateral creditors like Japan, China and India to convince the IMF’s Executive Board.

Ensuring support from China will be crucial in this regard. Chinese authorities have sent hot and cold signals in the months since the debt freeze was announced in April. Although China has expressed support for Sri Lanka’s talks with the IMF, it has yet to fully and publicly commit to joining negotiations with other bilateral lenders. Perhaps China, a relationship-based lender, is waiting for the new government to make new high-level overtures. Meanwhile, Sri Lanka’s debt advisers – Lazard and Clifford Chance – will begin negotiations with private creditors holding government bonds. Some of them are likely to face legal disputes as Sri Lanka unilaterally defaulted in April.

Certainly, spending a few extra weeks completing the SLA isn’t a bad thing if it helps to better ground the program in current socio-political realities. Attempting to enforce an agreement that does not adequately recognize the dramatic changes that have taken place could jeopardize the program’s public acceptance and longevity. There are four key areas that the new government must address. First, the program with the IMF cannot focus solely on revenue-based fiscal consolidation (simply higher taxes); it also needs to address the spending side. There is a growing public demand for accountability for public finances, better debt management, and fighting politicization and corruption in government. These are no longer concerns limited to political wonks; They are shared in society. Misprioritized public spending (e.g. military spending dominating the budget) has hampered investment in health, education and innovation. While higher taxes and a broader tax base are indeed necessary, people’s willingness to accept a stricter tax regime will increase as they see greater accountability for how revenue is spent.

Second, any IMF program must be accompanied by a domestic consensus on core reform areas. It is not just about “signing on the dotted line” an IMF agreement now, but also about ensuring smooth implementation in the years to come. The economic costs of letting a narrow political kowtow get in the way are too high. The extent of the reforms required requires a consensus between political parties and key stakeholders. It is encouraging that over the last few weeks we have seen a group of MEPs agree to pursue a minimum joint programme, which has had input from a range of stakeholders. This must now be more effective in order to prevent later political setbacks.

Third, policy making must become more inclusive. One of the ousted regime’s biggest governance failures was its island politics. The president’s COVID-19 task force was led by a military commander, not a health professional or senior official. The design and implementation of social benefits in the COVID-19 era had no input from those outside of the bureaucratic and military circles. Anti-poverty think tanks and civil society organizations that understand the impact on families, informal workers and vulnerable groups have not been welcomed. A task force on economic recovery from COVID-19 had a handful of non-government members drawn from a narrow swathe of the private sector and only one woman, a political officer in a public agency. The ill-conceived fertilizer ban was informed by paediatricians and priests, not by graduate farmers and agricultural economists. The central bank’s Monetary Board and Monetary Policy Consultative Committee were re-formed to crowd out those with different views and include those who shared the same government economic and political ideology. The new government should do the opposite: hear voices that are more representative of society and allow for dissenting opinions and views from outsiders in a structured way.

Fourth, an honest and future-oriented picture must be drawn. The new government must explain what policy steps will be taken, why and when, what the results would be and how they will help alleviate economic hardship. There needs to be an honest conversation with the electorate, where the government is on an equal footing with the public, and the public in turn feels that the government has their back.

The way forward

Certainly, moving the IMF agreement from the staff level to an agreement fully approved by the Fund’s Executive Board has less to do with domestic politics and more to do with the progress of the debt restructuring talks. Prospective IMF financing is conditional on a fair and expeditious renegotiation process with Sri Lanka’s creditors (private and bilateral) to place the country on a debt sustainability path. But the future success of an IMF program, once approved, and the overall reforms in its arena, could be heavily determined by domestic politics and wise policymaking. Any attempt to impose a reform program without a clear rationale, expected results and measures to protect the vulnerable will meet with opposition from politicians and the public. Any attempts by the Sri Lankan leadership to tighten its grip on society under the guise of accelerating an IMF program will most likely face opposition from a newly awakened and vigilant citizenry.

Anushka Wijesinha is a Colombo-based economist and co-founder of the Public Policy Think Tank Center for a Smart Future

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