Implementing IMF Reforms in Sri Lanka Will Be 'Painful', But They Are Essential, Says Policy Analyst

Sri Lanka has been facing its worst economic crisis in over seven decades, which has been spurred by a balance of payments crisis and led to widespread fuel, food and other shortages. Inflation is now over 50 percent. In April, the government also announced that it would be defaulting on its external debt obligations, amounting to $51 billion.

The first in-person mission of the International Monetary Fund (IMF) to debt-stricken Sri Lanka concluded on Thursday, with the talks between the Western lender and Colombo ending without a deal.

The US-based lender also asked Colombo to get "adequate financing assurances" from the country's creditors, which include the Western allies as well as China, in order to cut a bailout deal.

Sputnik spoke to K. Don Vimanga, a policy analyst at the Advocata Institute, a Colombo-based think tank, to understand how crucial the IMF package is for Sri Lanka and what he makes of the austerity measures that usually come with an IMF bailout.

Sputnik: The Sri Lankan government has sought an IMF bailout 16 times between 1965 and 2016. How crucial is securing the IMF bailout for the Sri Lankan government this time around?

K Don Vimanga: Even though we have gone to the IMF before, it is worthwhile to note that we have not followed through an IMF program successfully. Sri Lanka is facing its worst economic crisis since 1948 and a key reason for that is that we have not implemented essential reforms, which have been part and parcel of these IMF programs.

Continuous twin deficits and poor policy decisions have led to where we are now. We are now in a situation where we have no macroeconomic stability and have thus lost credibility and access to imports and capital. The IMF is the only organization which can give us the credibility we need to access funds.

Even if we want to get support from our bilateral partners, an IMF program is still essential as it provides third parties with transparency (assurance that the money will be used to import essential goods as opposed to other reasons e.g. bailing out bond holders).

The IMF will help build Sri Lanka’s credibility and restore confidence among lenders and open the floor for bridge financing- a necessity to tackle the severe shortages of essentials that are affecting people.

While several reforms are needed, building macroeconomic stability is most crucial, and required for any other reforms to take place. This can only take place through such an IMF program. The IMF bailout package would support Sri Lanka in promoting stability.

The objectives of the new IMF program entail restoring macroeconomic stability, debt sustainability, and protecting the financially vulnerable whilst fostering structural change. Therefore, it is the absolute need of the hour to secure an IMF program.

Sputnik: How do you assess the government's response to the current economic crisis? Is there anything you think the government could have done more to ensure that macro-economic stability is restored?

Vimanga: Sri Lanka’s economic crisis was predicted from an early stage. We ourselves have been vocal about the impending crisis since 2020. Our debt sustainability analysis, released in September 2020 made a strong case for debt sustainability prior to current events.

Other economists and leading experts warned of the dangerous consequences of implementing poor policies and ignoring early warning signs. Solutions were also presented. However, the government did not heed to any warnings.

Some policy makers assumed that the issue was a short-term liquidity problem (as opposed to a solvency issue) where COVID and the resultant lack of tourism was the point of blame.

Overall, the lack of acknowledgement of the severity of the pending crisis and the consequent lack of efforts to take any remedial actions early onwards has led to where we are now. This is also because there is a lack of evidenced based policy making among policy makers in the country.

Had we gone ahead with introducing reforms early onwards, maybe we wouldn’t have had the need to go to the IMF.

Sputnik: There has been some criticism around the repeated IMF bailouts afforded to the Sri Lankan government. There have been arguments that the IMF aid to developing countries comes with a set of conditions attached, which disadvantage domestic industry. Are you concerned about the downsides of Sri Lankan government approaching the IMF repeatedly, more so this time when expected austerity measures are expected to further weigh on the vulnerable communities?

Vimanga: A key reason why Sri Lanka, again has reached the current crisis is because over time we have de-liberalized our economy. Therefore, real change can happen if we liberalize our economy, embrace free trade and allow the market economy to function.

Implementing such market-friendly policies are the only means of achieving sustainable growth, however, Sri Lanka followed policies counter to this. Policies such as import substitution, price controls, excessive meddling with markets and restricting the price mechanism along with numerous other policies paved the path for the current crisis.

Therefore, the real answer is that the only way out of this crisis is for a complete reset of the economy supported by a strong pro-market liberalization agenda.

With regard to the IMF program. I am sure there is strong criticism regarding some of the reforms proposed. But in our case, these are reforms that ideally have should have happened. If these reforms such as getting rid of loss-making state-owned enterprises, strengthening oversight over public finances, monetary policy stability and an independent central bank to name a few were carried out the current crisis would have been less severe.

However, implementing these reforms is now going to be painful but necessary if Sri Lanka has to emerge out of the current crisis.

The measures we have to go through will make things more difficult for people- but it is necessary to ensure that the next generations to come can have better living standards. We cannot recover from the crisis without taking some painful decisions. This is why the reforms proposed also include recommendations for social protection through a much more effective social safety net for all vulnerable cross sections of society.

It is [also] important to stress the importance that this crisis comes at a crucial point for Sri Lanka. If these reforms are done they can help ensure long-term stability for generations to come, but this will only be the case if these reforms are performed completely. A complete reset at a time like this is essential. If not now, then when.

Sputnik: From an economic perspective, how badly has the current economic crisis hit poverty levels in Sri Lanka? Do you support extending the 'Samurdhi' social security scheme to cover more households, or DO you support it being further streamlined?

Vimanga: Following the significant price increases in especially essential items including food, the poor have been severely affected by the crisis. There are people who can only afford to eat one meal a day. There are also children from vulnerable families who are suffering from malnourishment. It is essential to have a safety net to protect the vulnerable.

Sri Lanka has 32 social safety nets, the main one being Samurdhi. However, this has been seen as ineffective. One major issue is that there are many people well above the poverty line who seem to receive Samurdhi and Divinaguma (another social security scheme), while there are those below the poverty line who do not get any relief.

The United Nations International Children Emergency Fund (UNICEF) found that 58 percent of households who were meant to receive Samurdhi did not receive the benefits while 58 percent of households who were not supposed to receive have in fact received the benefits, indicating the need to improve targeting.

Another key issue when it comes to such schemes, there are many and the admin costs of running such schemes is expensive. So not only is it not effectively targeting the people in need, but it is also running extra costs due to inefficiencies in administration. All these have to be considered when streamlining an effective social protection program.

The views and opinions expressed in this interview are those of the expert and do not necessarily reflect the position of Sputnik.