COLOMBO: Sri Lanka’s two presidential frontrunners have pledged to renegotiate the agreement with the International Monetary Fund (IMF), increase social security and ease people’s financial burdens, but experts say major deviations may not be feasible though it is possible to chip away at the edges. The fact of the matter is, irrespective of who becomes the president on September 21, he has an insurmountable task to revamp the economy and to keep things afloat.
A new government will have to ensure that we meet revenue targets already agreed to. This is not negotiable. It is fundamental to the country’s survival to have a stable tax revenue flow,” said Umesh Moramudali, a lecturer in economics with the University of Colombo.
Sri Lanka has performed well with revenue targets so far. There is little scope for making changes there. Irrespective of who comes to power, the IMF will have to adopt a pragmatic approach and work with the new administration. Negotiating with external creditors is a time-consuming complex process. And neither the Samagi Jana Balawegaya (SJB) nor the National Peoples’ Power (NPP) will run such a political risk at this moment, Moramudali noted.
The immediate priorities of the next government, according to Imran Furkan, a geopolitical economic risk analyst, will be to reach agreements with bond holders to overcome the island’s default status, deal with corruption towards accountable governance and to create conditions to increase consumption to pre-crisis levels to stabilise the economy and increase revenue.
Furkan said that either party will try to introduce economic relief (which will require legislation). “The SJB will focus on expanding social welfare while the NPP will try to offer relief while tackling corruption,” Furkan told this newspaper. He added that the NPP has already been engaging with the IMF, realising that it will become necessary to reach an understanding in case of a victory. “Tackling corruption is key if Sri Lanka is to promote foreign direct investment,” he said.
There is agreement that there are lessons to be learnt from the economic mismanagement of the Gotabaya Rajapaksa administration which brought the country to a standstill in 2022.
For new Lanka Prez, economy revamp, keeping things afloat a huge challenge
A source from the Ministry of Finance, Economic Stabilization, and National Policies told this daily that the current “absence of economic tension” is due to measures taken to stabilise the economy, including tariff and tax increases, and not some respite artificially created through the suspension of external debt repayments.
“The country has been servicing its debt in 2022 and 2023 amounting to $2,483 million and $2,589 million, almost half of the standard annual debt service payments before the moratorium,” the source said.
Alan Keenan, Senior Consultant of the International Crisis Group, in a written message said: “With many Sri Lankans still struggling to make ends meet more than two years after the country’s economic collapse, the upcoming presidential election promises to be close, tense, and possibly pivotal in setting the country’s future political trajectory.
“Whichever candidate wins and whichever government is formed in the coming months, they will need to respond to public demands for greater equity in the budget cuts, tax rises and tariff hikes required by the IMF bailout program, as well as more boldness in fighting corruption and making governance more transparent. Failure to do so could further weaken public support for reforms essential to sustaining Sri Lanka’s economic recovery.”
Ahead of the September 21 polls, the ICG released a new report on the political aftershocks of Sri Lanka’s economic crisis and the IMF recovery program titled: Sri Lanka’s Bailout Blues: Elections in the Aftermath of Economic Collapse.
“The IMF, in coordination with its contributing member states and other multilateral institutions, should be open to revisiting elements of its reform program, including a new debt sustainability analysis that could help deliver the additional debt relief needed for Sri Lanka’s recovery to be economically and politically sustainable. The Sri Lankan economy may for now have been put back on its feet, but many citizens still need to be convinced the price is worth paying,” Keenan added.
ICG warned that despite an IMF bailout, the risk of return to debt distress remains high – as does the possibility of renewed unrest and political turmoil. “The election offers Sri Lanka a chance to reconsider the direction of the reform program and correct some of its worst flaws” the report said.
Meanwhile, the Finance Ministry source identified the macroeconomic reforms as the true drivers of stabilisation and said Sri Lanka needs to rebuild its fiscal strength carefully.
Dilrukshi Handunnetti
Award-winning journalist and lawyer, founder and director of the Colombo-based Center for Investigative Reporting (CIR)
