By Ameer Ali –

Dr. Ameer Ali

“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists” ~ Ernest Hemingway

After concluding its review on SL’s economic progress during last year and commending the regime for its “unwavering commitment to the program’s implementation”, the IMF review commission has recommended the release of the next tranche of $337 million to bring it to a total $1billion since March 2023, but with a reminder that “sustaining the reform momentum and addressing governance weaknesses and corruption vulnerabilities are critical to put the economy on a path towards lasting recovery and stable and inclusive growth”. What this means is that lasting recovery is not possible unless there is going to be a system change. While expressing general satisfaction over “all quantitative performance criteria and indicative targets, the commission’s Chief and his Deputy did not however fail to point out that the reduction in “social spending” has not met the recommended target. Herein lies the class bias in IMF’s reform agenda and economic liberalism’s war against welfare entitlements. Social spending includes importantly education and health, and IMF would prefer more private investment in these sectors so that government budget deficits could be reduced. President Ranil Wickremesinghe’s warpath against subsidized education and public healthcare via funding cuts in real terms and his preference for private universities and hospitals are too well known to require added emphasis. The only support IMF recommends to the poor therefore is the social safety net which was why RW created the aswesuma.      

In spite of IMF’s guarded optimism about the economy’s recovery, reality on the ground tells a different story. Almost 7 million Sri Lankans are living in poverty, more than 100,000 micro and small enterprises have been shut down and over one half of a million households had lost electricity connection for not paying their bills. Too many families are finding it unaffordable to buy textbooks for their school kids, and malnutrition is pervading a whole generation of children. Government hospitals are starved of medicine, doctors and nurses, and schools are understaffed and ill-equipped, and causing teaching standard to take a nosedive. The exodus of the educated, professionals and the able bodied continues unabated, and at least theoretically it will continue until the marginal cost of migration equals the marginal benefit of staying at home.

True, with CBSL’s compliance with IMF’s agenda the financial sector has reached a degree of stability. Headline inflation has tumbled from a staggering 70% to single digit although it still remains above the target rate of 5%, and the rupee has appreciated against the dollar. For the first time since 2022 the buying rate of dollar has dipped below Rs.300. But have these achievements been translated into lower prices and adequate supply of essential goods in the market? Why doesn’t the market reflect these achievements so that middle and low-income consumers could enjoy the benefits? Why rice, the nation’s staple, is still scarce in a number of towns in spite of a bumper Maha harvest? In short, why is the free-market economy remaining unfree and fail to respond to market fluctuations? In essence, IMF’s plaudit for SL’s financial stabilization has not been translated into stability in the real sector of the economy. To IMF, stability of the monetary sector is the key to economic growth, because it oils the growth locomotive. Sadly, it was this narrow focus on economic growth and rapid financialization of economies since 1980s that led to so many monetary crashes resulting in economic slowdowns and recessions. When “corruption vulnerabilities” are added to this failure as in Sri Lanka bankruptcy is inevitable.  Hence economic reforms should not focus narrowly on finances alone but broadly on the wider economy.   

Another objective of IMF’s focus on financial stability is to enable Sri Lanka to accumulate as much hard currency as possible before the government commences debt negotiations with foreign creditors. This would simply mean that Sri Lanka’s economic recovery cannot be sustained unless it finds a negotiated solution to service its foreign as well as domestic debt. Accordingly, with import and capital controls as part of tight monetary policy, with inflows of dollars through financial assistance from WB and ADB, and with increasing remittances from expatriate workers, and from tourism, foreign reserves reached a total of $4426 million in January this year. It is unlikely that those controls would be relaxed soon and certainly not until after completing external debt restructuring. Already and as part of the debt restructuring exercise, CBSL Chief Dr. Nandalal Weerasinghe had pushed down the throats of domestic creditors to share part of the loss by accepting a lower return on saving funds such as EFF and ETF. Even here Dr. Weerasinghe continued to reflect IMF’s class bias by exempting the commercial banks with the argument that banks were already paying a higher rate of tax. After this exemption, commercial banks are found to be enjoying roaring rates of profit while their poor customers are facing the brunt of IMF’s economic reforms.

Having commended the government for its commitment to the program IMF has reminded the regime to commence restructuring negotiations with foreign creditors without delay. This is the known unknown that is going to usher in either a summer of economic hope or winter of economic despair. Unless the creditors are going to be extraordinarily and uniquely generous to wipe out Sri Lanka’s entire debt amounting to $52.7 billion (in September 2023), which would spell disaster by setting up a bad example, any other form of solution would involve servicing and settling the debt at concessionary interest rates and over extended terms to settle. When debt servicing starts Sri Lanka’s dollar reserves have to increase faster. There is no guarantee that this is going to happen with a political culture rotten to its core. More import controls, tighter monetary policy and higher retail prices are not going to disappear. IMF reforms are silent on Sri Lanka’s political culture, which allows one to assume that it approves the prevailing system and expects it to deliver growth and progress. Ever since the aragalaya was staged in 2022 the cry for system change has grown louder and louder. Steady and inclusive economic growth is not possible within the prevailing political culture. The recent mass resignation from COPE is just one example demonstrating how incorrigible the system has become. Even worse is the declaration by former President Maithripala Sirisena under whose presidency the Easter infamy occurred now confessing that he knew the brain behind it, and the current president and his Attorney General Department remain totally insouciant about it. How far is this political culture going to deteriorate and become chaotic before the whole system is thrown out?                   

Meanwhile, President RW is yet to make up his mind whether to allow a General Election to precede or follow the Presidential Election. In the meantime, the cabinet has approved a proposal to initiate electoral reforms, which indicates that there is also a strong possibility of postponing the General Election until the delimitation process is completed. Yet and in spite of this uncertainty election fever is gripping the country and the season for promises and voter enticement has begun in earnest. RW had made the boldest of promises to create an economic paradise in 2048 when he would be a nonagenarian. On the economic front, all political parties are in consonance with the IMF reform agenda but with a caveat that they would renegotiate on certain items. Among these parties only NPP seems to have taken a stand that IMF reforms need wider focus and should directly benefit sectors such as agriculture and small industries that are the backbone of Sri Lanka’s economy. IMF’s “corruption vulnerabilities” pervade not only public administration but also local markets. The so-called free market is not free at all. They need cleansing of artificial rigidities before any reform could benefit producers and consumers. Those rigidities are part and parcel of the political culture. One or two spokespersons from the opposition seem to rely on advanced technology to solve the rigidities. Even technology in the hands of wrong managers could be manipulated to serve different purposes.  Therefore, the forthcoming election whatever form its takes presents a lifetime choice to voters between system change and system tolerance. The destiny of Sri Lanka’s economy and the welfare of its masses depends fatefully on that choice.    

*Dr. Ameer Ali, Business School, Murdoch University, W. Australia