The challenging task of sustaining the initial economic growth

The continuation of the International Monetary Fund’s Extended Fund Facility (EFF) is vitally important for the economy’s stability and growth.

However, complying with the conditions of the agreement with respect to the needed economic and governance reforms is a challenging task. This is especially so as this is an election year. Furthermore, the outcomes of the presidential and parliamentary elections will determine its continuation or abandonment. The discontinuance of the arrangement could be an economic disaster.

Implementation

The challenging task of sustaining or accelerating the initial economic growth depends on the implementation of the IMF arrangement. This is especially so, with respect to the condition to privatise state-owned enterprises and comply with governance reforms highlighted in the IMF’s Diagnostic Report.

Media conference

The IMF team expressed their satisfaction with the progress made by Sri Lanka in the implementation of the IMF programme. They said this in their statement after the second review, and at the media conference at the Central Bank soon after, they emphasised the need to implement the challenging reform agenda.

Statement

In their statement, the IMF said, “Key reforms in macroeconomic policies are showing promising results, with initial signs of growth and positive outcomes in areas such as disinflation and reserve accumulation. However, sustaining this momentum and addressing governance weaknesses and corruption vulnerabilities remain pivotal for fostering lasting recovery and ensuring stable and inclusive growth.”

This is indeed a difficult challenge.

Political difficulties

Last Sunday’s column discussed the political difficulties of implementing the reforms in the forthcoming years. Today’s column highlights the challenging nature of those reforms. The IMF, too, said the implementation of the reforms was imperative and challenging.

Economic growth

The economy has shown signs of growth after two years of contraction. The economy that contracted in the last two years turned around in the third quarter of 2023, when the economy grew by a modest 1.6 percent. It is expected to grow by 4.5 percent in 2024.

Challenging

Sustaining this growth momentum is a challenging task in this election year. Global economic conditions are also unfavourable for exports, and the cost of essential imports might increase sharply.

Weakness

One of the weaknesses of the recovery was that it hardly benefited the poor and vulnerable. Poverty and malnutrition have increased. In recognition of this weakness, the government is implementing several programmes for poverty alleviation. The acceleration of the economic growth momentum is expected to be more inclusive.

Implementation

The IMF stressed that “accelerating the growth momentum required the implementation of reforms and addressing governance weaknesses and corruption vulnerabilities that remain pivotal for fostering lasting recovery and ensuring stable and inclusive growth.” These are the most difficult to implement.

Corruption

The eradication of corruption and addressing governance issues that are cancers requiring deep surgery are near impossible unless there is a revolutionary regime change.

Economy

The economy grew by 1.6 percent from a year earlier in the third quarter of 2023. This is the first expansion in a year and a half. Inflation has moderated significantly, and other economic indicators, such as those for manufacturing and services, show signs of recovery. The IMF has projected that the economy will expand this year and that growth will accelerate next year.

Difficult

In spite of these economic achievements, the

IMF’s reform agenda is difficult to implement at the best of times and nearly impossible in the run-up to elections.

No doubt, the results of the elections would determine the future course of reforms and the continuation of the IMF programme, but this year’s run-up to the two elections would be a difficult time to implement the IMF reforms. Their implementation would have to await the election of a president and parliament in the forthcoming elections.

Summing up

Two members of the IMF team, Krishna Srinivasan and Peter Breuer, summed up the current situation eloquently in an article in the Sunday Times of February 22.

They said, “Although it may seem as small as a pinhole at the moment, continued reforms will accelerate passage through the tunnel and allow this light to become bigger and bigger. Maintaining the reform momentum is Sri Lanka’s best hope for recovering from one of its most severe economic crises.”

Conclusion

The continuity of the IMF programme depends on the outcome of the elections. If President Ranil Wickremesinghe is re-elected with the support of a parliamentary majority, the IMF arrangement will undoubtedly be implemented. If the next president and the party in control are not agreeable to the reforms, the IMF agreement and the reform programme will be abandoned. How the economy would perform then is difficult to envisage.

Que sera sera: What will be will be.