The aftermath of Sri Lanka’s economic crash

5 March by Meera Srinivasan

“Anti-government protest in Sri Lanka 2022” by AntanO is licensed under CC BY-SA 4.0.

As the island nation eagerly awaits a provisional IMF package to chart its path to economic stability, it is currently witnessing a new wave of protests, mainly by workers and professionals, as people’s economic hardships increase. The government also faces criticism over the recent postponement of local body elections

For nearly a year now, many in Sri Lanka have been fervently chanting three letters — IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
(International Monetary Fund).

As the country’s familiar balance of payments Balance of payments A country’s balance of current payments is the result of its commercial transactions (i.e. imported and exported goods and services) and its financial exchanges with foreign countries. The balance of payments is a measure of the financial position of a country vis-à-vis the rest of the world. A country with a surplus in its current payments is a lending country for the rest of the world. On the other hand, if a country’s balance is in the red, that country will have to turn to the international lenders to meet its funding needs. problem escalated last year, citizens experienced crippling shortages and painfully long power cuts. They took to the streets in a staggering mass protest and ousted the Rajapaksas, who they held responsible for their suffering. The chant, seeking IMF support, persisted through these dramatic developments.

In July 2022, former Prime Minister Ranil Wickremesinghe was elected President, through an urgent parliamentary vote. One of the first tasks he set for himself was to negotiate an IMF deal to resurrect the country’s battered economy. Sri Lanka entered a staff level agreement with the Fund on September 1, 2022.

Looking for a bail-out
Mr. Wickremesinghe recently announced that his government had completed 15 tasks prescribed by the IMF, in preparation for its assistance. The IMF’s provisional $2.9 billion package will come through by end of this month, he said.

In fact, Sri Lanka had hoped to tap it by the end of last year, or at least in January this year, but the process had dragged on. One of the main reasons for the delay had to do with written financing assurances from China, Japan, and India, Sri Lanka’s top three bilateral creditors. The IMF had made its programme contingent on their cooperation. India took the lead and sent its assurances to the Fund this January, with the Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

group of creditors, which includes Japan, following suit. China’s written financing assurances alone are pending.

Should the IMF package kick in later this month, either with China coming on board, or with other official lenders expressing confidence for the Fund to go ahead and clear it, Sri Lanka will see it as a critical milestone in its economic recovery. Evidently, a $2.9 billion-Extended Fund Facility, over a period of four years, is not big money for Sri Lanka. Even after streamlining imports to save dollars, the island nation spends well over a billion dollars every month on essential imports alone. Exports totalled $978 million in January, pointing to an enduring trade deficit.

However, an ongoing IMF programme helps Sri Lanka become more credit worthy in the eye of global lenders, be it multilateral agencies like the World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

or the Asian Development Bank, bilateral partners, or private creditors. The bankrupt nation that defaulted on its $51-billion external debt last year hopes that with an IMF programme, it can borrow again. After falling into a cycle of indiscriminate borrowing, especially in the last 15 years, Sri Lanka finds itself in a position where its problem, and its solution, look eerily similar at this point.

Tackling corruption
What could potentially make a difference this time is the IMF’s emphasis on fixing Sri Lanka’s corruption vulnerabilities, which has been a rallying point for many Sri Lankan economists and policy analysts. It is corruption that led Sri Lanka to this precipice in the first place, they argue. Corruption, coupled with the state’s tendency to implement “populist” welfare programmes that are “unsustainable”, made the country’s economy fragile over time, in their view. So much so that 16 of the past IMF agreements could not turn the tables for Sri Lanka.

Critics of the IMF, a very small minority in Sri Lanka, see an IMF package as part of the problem, not the solution. They worry that the austerity measures that come attached with it will be a deadly blow to the people, especially the country’s working class that is worst affected in this crisis. Apart from that, there is no raging public debate on, or popular resistance to, the IMF within Sri Lanka unlike in say, Argentina in recent times. On the IMF package, the average Sri Lankan is preoccupied more with when it might come through, rather than whether the country really needs it.

Even worker unions, currently protesting against the sharp increase in taxes and utility bills — introduced by the government in anticipation of the IMF programme — are resisting only the specific policy measures that are hurting them. Otherwise, they appear reconciled to yet another IMF-led reform agenda, an “inevitable, bitter pill”, as it is often projected.

Food insecurity
Over the last year, poor families have been forced to reduce their food intake drastically. Soaring prices have kept eggs, fish, and meat out of reach for many, raising concern among medical practitioners over nutrition levels in the community. With inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. persisting over 50%, half of the families in Sri Lanka are forced to reduce the amount they feed their children, humanitarian organisation Save the Children found in a recent survey. Additionally, they warned of a “full-blown hunger crisis”. The World Food Programme, in its January update, estimated that 33% of Sri Lankan households are food insecure.

Irrespective of when the IMF programme kicks in, and how much more money Sri Lanka can borrow after that, it will be a rather rocky road before possible recovery.

The country is currently witnessing a new wave of protests, mainly by workers and professionals, as people’s economic hardships increase. The government also faces criticism for the recent postponement of local body elections, even as multiple surveys point to a significant rise in support for opposition parties. But for those looking for policy coherence, such as the business community, the Wickremesinghe administration symbolises a version of stability. Democracy can wait, they contend, since economic recovery is urgent. For many others, Mr. Wickremesinghe, who lost his mandate in the last general election and rose to power with the support of the widely despised Rajapaksas’ party, represents continuity of a political order they fought to change. They see election as a vital barometer that will reflect this sentiment.

Meanwhile, how Sri Lanka charts its path of economic recovery will be evident in the coming months. Nearly half a century after liberalising its economy — Sri Lanka was the first in the region to do so — the country has confronted some fundamental questions, about how much it produces, how much it still imports, and how little its export basket has diversified in all these years.

These are questions that go beyond the problem of corruption. These are also questions that have a bearing on the country’s overall progress, which can’t be measured without factoring in the extent of inequality.

The latest Household Income and Expenditure Survey of 2019, conducted before the pandemic and Sri Lanka’s crisis, showed an increase in the Gini coefficient, a measure of income distribution, to 0.46, reflecting widening inequality. The IMF has said that a key element of its programme would be to mitigate the impact of the crisis on the poor by raising social spending and improve the coverage and targeting of a social safety net.

As the government goes ahead with its austerity measures, it remains to be seen if it can support its most vulnerable citizens.

This is the first part of a series of articles looking at Sri Lanka’s economic recovery and political course

Courtesy : The Hindu



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