The International Monetary Fund (IMF) has approved $3 billion loan to Sri Lanka under the new Extended Fund Facility (EFF) arrangement. The IMF statement said the loan facility will help to restore the country’s “macroeconomic stability and debt sustainability, mitigate the economic impact on the poor and vulnerable, and strengthen governance and growth potential”.[i] The much-awaited IMF support to Sri Lanka materialised mainly because of an understanding reached between the IMF staff and government officials regarding implementation of various economic reforms at the domestic level and debt restructuring assurances provided by the important bilateral donors such as India, China and Japan. Other bilateral partners of Sri Lanka, Saudi Arabia, Hungary, Kuwait[ii]and Paris Club also came forward to provide debt restructuring assurance to the IMF.
The government is hoping that the IMF support can address some important challenges. One, it may help the country to get access to international markets, in terms of resuming loan services and in increasing the confidence of investors. It can also pave the way for new financing from multilateral institutions such as the World Bank and the Asian Development Bank (ADB). According to the President of Sri Lanka Ranil Wickramasinghe, the IMF supported programme is critical in restoring the economy and he emphasised that any “violation of the agreement with IMF could result in discontinuation of collaboration with all financial institutions and annual payments of approximately Rs.6-7 billion (Sri Lanka Rupees) of loans, due until 2029”.[iii]Meanwhile, to fully obtain and benefit from the IMF loan, Sri Lankan government will have to submit a comprehensive report on liberalisation of the economy, digitalisation and sustainable recovery.[iv]Promoting Good Governance in Sri Lanka is another important condition attached to the IMF loan. In this regard, the government has promised to introduce Anti-Corruption Bill and the "Stolen Assets Recovery Initiative (StAR)” with the help of World Bank and the United Nations to prevent the recurrence of similar crisis. Sri Lanka has also sought India’s help in establishing good governance, institution building and public service delivery.[v]
Second, the IMF loan may also ease the pressure on the government at the domestic level. It is continuously facing pressure from various sections within Sri Lanka in the last eight months, to revive the economy and to ensure normalisation of essential services. However, convincing the public about the efficacy of various economic policy reforms undertaken as per the guidelines of the IMF to boost the government revenue has been a challenge. For example, the government increased the professional taxes in January this year ranging from 12.5 percent to more than 36 percent. Despite the popular opposition to the new tax policy, the decision to increase tax was defended by the government on grounds, of the “need to endure hardships” for a couple of months, to get the economy on track.[vi] High inflation, long power cuts, non-availability of essential services is still a challenge which is drawing the public to the streets in protest. For instance, more than forty trade unions of Sri Lanka observed one day general strike on 15 March 2023, demanding tax cuts, tariffs and interest rates reduction, etc. Despite the popular opposition to reforms, the present government seems to be determined to continue with the economic reform agenda including restructuring of key loss-making state ventures namely the Road Development Authority, Sri Lankan Airlines, Ceylon Petroleum Corporation and Ceylon Electricity Board.[vii] These reforms, the government believes, will increase the government revenue up to 15 percent of GDP by 2026.
To implement the reform agenda, the government also needs the support of Opposition parties, such as, the Samagi Jana Balavegaya (SJB), JVP led National People’s Power (NPP) and Sri Lanka Tamil parties. The SJB and the JVP have tried to put forward an alternative economic plan. The SJB, has laid out an economic plan document titled “Blue Print: Out of the Debt Trap and towards Sustainable, Inclusive Development: a Ten-Point Common Minimum Program for Sri Lanka’s Economic Recovery.[viii] The blue print talks about economic liberalisation, social market economy and restructuring of State-owned Enterprises, linking Sri Lanka to Global Production Networks. It did not oppose the IMF reforms in entirety. But it questioned the IMF rationale behind providing the loan facility to a government which is lacking people’s mandate. The SJB also stressed that the SLPP got the people’s mandate to run the country because it promised not to privatise public ventures.[ix] The JVP led NPP has also put forward an alternative national economic plan that talked about social market economy, the need for increasing economic participation of population to reduce inequality and the need to transform the country’s deep rooted corrupt political culture.[x] The JVP has been able to mobilise large public gatherings in recent months, emphasising on the need to hold early elections to elect a new government.
However, the government is unwilling to conduct elections amidst the economic crisis, until there is reasonable economic stability at the ground. The postponement of Local Council (LC) Elections, due since 2022, despite calls from Opposition parties, particularly from Tamil Parties of Sri Lanka to hold this election indicates that the present leadership is apprehensive of testing the support of electorate to the government at this juncture. This year is crucial for both the Mahinda Rajapaksa led ruling party the Sri Lanka Podujana Perumuna (SLPP) and United National Party (UNP) led by the President of Sri Lanka. Both the parties will have to regain the confidence of the public and will have to show tangible economic progress before commencing any election campaign. In this context, the current priority for the government seems to be the implementation of IMF programme.
The IMF programme will have to be implemented and completed in four years’ time. In this context, the main challenge for the present government is to put in place a robust social security system to gain the confidence of the people. Nonetheless, the rising popularity of JVP led NPP and SJB’s consolidated vote base is going to be a challenge for the President in the future along with implementation of economic reforms and debt restructuring measures as anticipated by the IMF.
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*Dr. Samatha Mallempati, Research Fellow, Indian Council of World Affairs, New Delhi.
Disclaimer: Views expressed are personal.
Endnotes
[i] International Monitory Fund.IMF Executive Board Approves US$3 Billion Under the New Extended Fund Facility (EFF) Arrangement for Sri Lanka, PRESS RELEASE NO. 23/79, 20 March 2020, https://www.imf.org/en/News/Articles/2023/03/20/pr2379-imf-executive-board-approves-under-the-new-eff-arrangement-for-sri-lanka. Accessed on March 24, 2023.
[ii] M U M Ali Sabry, https://twitter.com/alisabrypc/status/1635612953063075846
[iii]Ranil Wickramasinghe. 7 March 2023.https://twitter.com/RW_UNP?ref_src=twsrc%5Egoogle%7Ctwcamp%5Eserp%7Ctwgr%5Eauthor[accessed on information missing]
[iv] Ibid
[v] ANI, “Sri Lanka's Prez seeks India's help with policy reforms, governance, public service delivery”, 4 April 2023,
https://www.aninews.in/news/world/asia/sri-lankas-prez-seeks-indias-help-with-policy-reforms-governance-public-service-delivery20230404033052/. Accessed April 5, 2023.
[vi]Uditha Jayasinghe.Sri Lanka flags return to growth, protesters demand tax cuts.https://www.reuters.com/world/asia-pacific/sri-lanka-seen-returning-growth-by-year-end-president-says-2023-02-08/. Accessed on March 26, 2023.
[vii] News.lk. President requests the opposition to support the implementation of the IMF agreement. 27 March 2023, https://www.news.lk/news/politics/item/35181-president-requests-the-opposition-to-support-the-implementation-of-the-imf-agreement. Accessed on March 29, 2023.
[viii] Blue prin t: Out of the Debt Trap &
Towards Sustainable Inclusive Development
A Ten-Point Common Minimum Program for Sri Lanka’s Economic Recovery, https://www.newswire.lk/wp-content/uploads/2022/08/BlueprintEnglish.pdf. Accessed on March 24, 2023
[ix]Kiriella accuses IMF of double speak, The Island, 26 March 2023, https://island.lk/kiriella-accuses-imf-of-double-speak/. Accessed on March 29, 2023.
[x]Nishel Fernando.NPP unveils economic plan to build resilient social market economy. 26 January 2023, https://www.dailymirror.lk/breaking_news/NPP-unveils-economic-plan-to-build-resilient-social-market-economy/108-252945. Accessed on March 26, 2023.