After months of negotiations, crisis-hit Sri Lanka has secured a $3-billion bailout package from the International Monetary Fund (IMF) under its Extended Fund Facility (EFF). It is not an exaggeration to say that President Ranil Wickremesinghe’s focus has been entirely on the EFF to the exclusion of other issues. Last week, Colombo received an initial disbursement of $330 million under the EFF and the news has been mostly received with trepidation—and in some quarters, with grave suspicion. While it may appear a dire necessity to some, to others it is nothing but a further extension of the multilateral writ over the troubled island to further ensnare it in an ever-increasing external debt trap. Popular politics of the day paints a grim picture, a multilateral conspiracy to devour Sri Lanka’s remaining assets.
The bailout is important for Sri Lanka to boost investor confidence, especially after the island suddenly halted debt servicing and declared bankruptcy a year ago. It is also important as an EFF document has formally recognised Sri Lanka’s poor governance including deep-rooted, grand corruption. Little wonder why the IMF tied its support to an ambitious and painful reforms agenda. The bailout package is made available in phases—subject to strict half-yearly reviews.
For his part, President Wickremesinghe has taken every possible measure to pre-qualify for the bailout package with dogged determination. He has imposed austerity measures, slapped heavy taxes including a wealth tax, introduced a whopping 66% hike in electricity prices and strictly controlled imports. The combined impact of the direct taxes has made the population dizzy and triggered protests against unbearable inflation, especially of food. Wickremesinghe has continuously insisted there is no other road than the IMF way. He has unabashedly used law enforcement authorities to quell legitimate protests, enraging the people further.
Peter Breuer, the IMF’s Senior Mission Chief for Sri Lanka, during a March 21 virtual media briefing, acknowledged that Sri Lanka was already implementing some hard reforms towards debt sustainability. He attributed the economic crisis to “past policy missteps and economic shocks”.
Despite the suddenness with which it appeared in people’s daily lives, Sri Lanka’s financial crisis has been intensifying for years. The island began grabbing global headlines when the crippling balance of payment crisis, precipitated by structural and policy impediments, poured onto Colombo’s streets and elsewhere in the form of an unceasing wave of protests. The financial crisis brought the island to a standstill and triggered a political crisis that drove then president Gotabaya Rajapaksa out of office. The outrage was not just towards a family or an individual. It was condemnation of a system that caused a huge governance crisis—both political and economic.
Whether the bailout is anyway linked to those public aspirations for sustainable growth remains to be seen. The staff-level agreement—while offering a breather to the crisis-ridden nation—lays grave emphasis on governance reforms. The critical financial sector reforms will impact the most vulnerable sections and the IMF calls for social security and measures to mitigate impacts of economic reforms on these populations. To do so, it calls for a minimum expenditure floor through a well-targeted spending plan which has a new ‘social registry’ based on objective eligibility criteria. It has also confirmed that while 40% of households qualified for social security, 10% of that social safety net expenditure was spent on the rich!
But a bailout also increases the nation’s burgeoning external debt. After gaining IMF membership in 1950, Sri Lanka has already obtained 16 facilities. Whether the island achieved the envisaged progress, what necessitated those many facilities or whether the economic resets worked remain debatable.
In short, the EFF is an IMF instrument providing financial assistance to countries like Sri Lanka that are weighed down by serious medium-term debt servicing problems stemming from structural issues. In support, the IMF offers long-term engagement, low interest, and longer repayment periods. A panacea? Not so fast.
The current plight of Sri Lanka is its own making. The island’s economic woes are now an Asian case study for the IMF. It is not good enough to try fulfilling conditions to keep qualifying for the next tranches but to turn the searchlight inwards to critically examine what ails the island economy. The EFF offers more than a clue—and makes a strong connection with last year’s peoples’ call for a seismic “systemic change”.
Today, Sri Lanka is an IMF case study, the first of its kind in Asia, of a Governance Diagnostic Assessment (GDA). Unpack the term GDA and we have an incomparable scenario: reeking corruption, cronyism, nepotism, wrongful benefit distribution, tax evasions, money laundering and so on. The list is endless.
Angry youth have been agitating for course correction, risking arrests and brutal assault. They have clamoured for justice, normalcy, transparency and an end to a political order that benefits only the ruling elite. Though the government has cracked down on protests with a combination of violence, coercion and arrests, the staff agreement is a formal recognition of the island’s governance collapse.
President Wickremesinghe, meanwhile, stays committed to economic rebound and has set himself an ambitious deadline of 2026 to overcome bankruptcy. He also pledges to reduce inflation to a single digit by the year-end and provide relief to those in need. But his single-minded pursuit of economic recovery is undermined by his own tactic of violent crackdowns. He has, systematically, undermined the constitutionally recognised rights of the people by only showing the economic carrot. In doing so, he is treading a dangerous path of undermining people’s sovereignty.
Moving forward, Wickremesinghe will now have to demonstrate similar fortitude in curbing corruption. The EFF emphasises on anti-corruption and governance reforms, and calls for improvements in public financial management, assets declaration, assets recovery and strengthening the legal framework within the UN Convention against Corruption (UNCAC).
It is his public duty to address the governance issues raised by angry protesters last year. Economic reforms cannot be achieved in a democracy vacuum. Last year’s political events were a red flag for those who abuse public trust. They serve as a stinging indictment on the popular Rajapaksas in the court of public opinion. Wickremesinghe should heed the warning.
The Sri Lankan crisis is much more than a financial one: it is about stinging governance failure. Of wanton political leaders. Now that Sri Lanka is a case study on how not to run a country, let this shame become a force—a pressure to push the island towards course recovery.
Dilrukshi Handunnetti
Award-winning journalist and lawyer. She is a founder and director of the Colombo-based Center for Investigative Reporting (CIR)