Political stability and IMF assistance vital to resolve economic crisis

Political stability and International monetary Fund (IMF) assistance are crucial for resolving the unprecedented severe economic crisis. The current widespread social unrest and political instability are severe obstacles to economic recovery.

Political and social unrest

How the prevailing social upheavals and political unrest will be resolved is uncertain. What is certain is that the widespread social unrest and political instability are serious constraints and impediments to economic recovery.

Social unrest and political protests have been widespread. At mid-week, they have grown to huge proportions at Galle Face and in many parts of the country. They call for one thing: The President and Government to resign.

Endorsed

This call has been endorsed by ordinary people, professionals and religious leaders, including the Mahanayakes. The President has responded only with an admission that he has made two awful mistakes and a new Cabinet of inexperienced ministers. How will this resolve the crisis?

Admission

The President has admitted making two grievous errors: Not going to the IMF much earlier and of not permitting chemical fertiliser for agriculture. The admission of such monumental mistakes, especially the fertiliser fiasco, would have been followed by any democratic leader’s resignation.

Impasse

The President’s response was a new Cabinet. How would this make his continuation in office and that of his brother be acceptable? How will the current political impasse be resolved?

Imperative

The resolution of the political crisis is imperative for an economic recovery. The longer the political stalemate drags on, the more unbearable the economic woes of the people. Mass starvation, malnutrition and a further deterioration of the economy is inevitable.

External finances

The current conditions are a threat to the external finances. A further deterioration in the balance of trade and payments is most likely.

Export manufactures are adversely affected by shortages of raw materials, electricity cuts, unavailability of diesel and gas and transport difficulties of workers. These are diminishing export earnings. They would diminish further with the reduction of foreign earnings from ICT services that are disrupted by power cuts.

Imports

On the other hand, import expenditure is increasing owing to higher costs of our essential imports like food, fuel, pharmaceuticals, raw materials and fertiliser.

Bankrupt

The New Year was heralded with the news that the country had declared itself bankrupt. Most commentators viewed this as one of the saddest days in the country’s history. The country’s record of never defaulting on debt repayments has been spoiled.

Rationale

However, there was a rationale in this decision. The meager reserves available were used to import essentials instead of repaying debts. This could alleviate the awful plight of people not having the basic necessities for living, to some extent. The credit lines from India are more significant. More to the point, we did not have the funds to pay anyway and this was a more respectable option.

IMF

There is no doubt that the assistance of the IMF is needed to resolve the country’s deepening financial and economic crisis. Are we too late and never able?

At the time of writing this column, a Sri Lankan delegation is seeking the assistance of the IMF to redeem the economy from its current perilous state.

Hopefully, they will be able to secure the assistance of the IMF for at least emergency aid through its Rapid Financial Instrument (RFI) to tide over the current difficulties and assist in the country’s economic stabilisation with an Extended Credit Facility later. The Indian government is extending its fullest cooperation to obtain IMF assistance.

A recent communiqué from the IMF has said that the IMF is “very concerned about the current economic crisis in Sri Lanka and hardships suffered by the people, especially the poor and vulnerable.”

However, the statement goes on to say that“IMF staff had determined last month in an annual economic review that Sri Lanka’s public debt was unsustainable, and the country needs to take steps to restore debt sustainability prior to any IMF lending, including the emergency RFI.”

“Such restoration of debt sustainability typically requires a restructuring or re-profiling of public debts, which in Sri Lanka’s case would require cooperation from China, one of its largest bilateral creditors,” it said.

The expectation of the RFI has also diminished as the statement clarified that the IMF “used the low-conditionality RFI loans extensively to assist countries during the COVID19 pandemic and has provided such loans to ease balance of payments problems after natural disasters, conflicts and commodity price shocks.”

Will the IMF bend its stance as Sri Lanka is in dire straits?

Instability

The current political instability is a serious constraint to obtaining the essential IMF facility that is imperative to resolving the economic crisis.

Some have argued that political stability is not a prerequisite as other politically unstable countries have obtained IMF assistance. They perhaps allude to the recent examples of Lebanon and Pakistan. The former elected a new government and the latter is yet to receive the full assistance.

Political stability is needed as the IMF requires an assurance that the government would undertake to meet the conditions of the IMF loan. More importantly, the structural adjustment programme for economic stabilisation and recovery cannot be implemented without a stable government.

Conclusion

The dire state of the economy, shortages of essentials and unbearable cost of living has led people of all walks of life, religions and communities to unite in a call for the President and Government to resign. The widespread social upheavals are gaining more support. Where these protests will end is uncertain.

These upheavals and political instability are severe constraints to resolving the economic crisis. The expected assistance of the IMF is uncertain if political conditions are not conducive to implementing an IMF reform and recovery programme. The nation’s future is bleak and uncertain. People’s livelihoods are under severe threat.