IMF: The long road ahead
The laboured decision to eventually go to the International Monetary Fund (IMF) proved ultimately the only option for the Government that was getting besieged by competing demands from India and China to which it kept going seeking loan after loan. It was mayhem out there with demands by both countries for access to Sri Lanka's harbours, while the President was dithering on what to do otherwise.
This Government must, therefore, take the blame for the inordinate delay in going to the IMF. Economists, like the scientists who kept telling the Government not to ban chemical fertiliser imports, were ignored. For more than a year and a half independent experts were telling the Government to go to the IMF without any further ado.
Voicing the views of these experts who know something about the economy and the way it was nosediving, way back on March 3, 2019 -- during the Yahapalana Government, we said the Government of the day was carrying on the same Rajapaksa- the- First policy of footloose commercial borrowings from abroad and raising the foreign debt from USD 10 billion in 2014 to USD 15 billion in 2018; that it was following myopic short- term goals mortgaging Sri Lanka to international lenders "to the hilt". (Budget: Sri Lanka confronts looming rollover crisis | Sunday Times Sri Lanka)
On July 25 last year ( 2021), eight months ago, we asked the new Finance Minister Basil Rajapaksa to engage in a "meaningful dialogue with the IMF" to identify changes in economic policy which the IMF can support so that Sri Lanka can access international markets when needed, partly to avert a foreign exchange crisis, and partly to address a Balance of Payments shortfall. We wrote about 500,000 additional households falling into poverty and called for a viable livelihood support programme as a "safety net" for the poor. ( New Finance Minister faces tough choices | Print Edition - The Sunday Times, Sri Lanka)
Fast forward to what the IMF has said in February, 2022. It calls for a string of similar strategies by Sri Lanka including strengthening fiscal consolidation based on quality revenue measures and revenue expenditure rationalisation: increase policy interest rates; a flexible foreign exchange rate; phase out import restrictions; a cost effective energy policy; a social safety-net and inter alia, a plan for debt sustainability.
Those in high office wore blinkers and ill- advised the President, a war hero of only a few years back, now facing the ignominy of jeering citizens marching to his private residence. It has also displayed the pitfall of an Executive Presidency where the most powerful person running the country sitting in an ivory tower is insulated and divorced from ground realities, often to his or her own peril.
The Finance Minister goes to the IMF in two weeks, and yet, the worry is, what is his team? Macroeconomics is not for him. We understand even at this late stage there is an effort to take on board the expertise of those who are not mere political apparatchiks, but nevertheless have an abiding love for the country and possess the skills of negotiating with international monetary funds. We are witnessing runaway inflation with pressures that will intensify, the Ukraine war compounding matters. The inane Forex policy through 2021 has resulted in an amended budget requirement, and an IMF bailout programme will only reduce some pressures on foreign resources.
While medium-term prospects for Sri Lanka look bleak, even with an IMF programme, it very much depends on these experts the Government has at its disposal -- not the cloistered experts, and possibly multinational law and financial services firms to negotiate with the IMF for a package that will bail itself out of this economic quagmire it has thrown the entire country into.