MARWAAN MACAN-MARKAR, Asia regional correspondent Courtesy Nikkei Asia

IMF warns of worse to come as South Asian nation fights shy of 17th bailout.

COLOMBO — Random flashes of public anger have erupted all across Sri Lanka, the South Asian nation in a deepening economic crisis exacerbated by the policy flip-flops of its ultranationalist government.

In some rural areas, effigies of ministers have been burnt by enraged farmers who have suffered from the government’s failed organic fertilizer policy, fingered by agriculture scientists as a main cause of the poor rice harvest.

“If they come here they will go home in a box,” a 52-year-old farmer in the north-central Anuradhapura region fumed, using an ominous idiom for a coffin.

In Colombo, the commercial capital, a fight broke out late one night earlier this month between car owners at a gas station close to the prime minister’s office in an affluent, tree-lined neighborhood. The fisticuffs occurred after sports utility vehicles of the rich had lined up with the ubiquitous three-wheel taxis for hours for the last drops of petrol and diesel — both now scarce.

The latest signs of a country on the edge have different causes from previous bouts of street unrest. Those ranged from human rights violations and media repression to angst following nearly three decades of civil war. Past protests were also staged by trade unions campaigning for better wages, and for women’s concerns and green causes.

Discontent is now being fueled by the pain families all over the strategically-located Indian Ocean island are feeling as the debt-ridden economy runs out of dollars to pay for vital imports.Fights have broken out at fuel stations where drivers queue for hours as the pumps run dry.   © Getty Images

“There is frustration over the government’s inability to handle the crisis and manage things,” Farzana Haniffa, head of the department of sociology at the University of Colombo, told Nikkei Asia, affirming the view held by many seasoned observers about who is the most to blame.

“People have just had enough,” she said. “The rank inefficiency is obvious — the powers that be have dropped the ball.”

March is being marred by mounting deprivation and daily price increases. A cooking gas shortage has forced hundreds of bakeries to shut down, milk products have become pricey — particularly hurting families with young children — and medicines are in short supply at pharmacies. Regular and lengthy power outages plunge much of the country into darkness, adding to the woes.

Cutting anti-government comments and sarcastic jibes on social media make clear the rising tide of discontent. A recent opinion poll by Verite Research, a Colombo-based think tank, mirrored the trend. President Gotabaya Rajapaksa’s administration received only a 10% approval rating — a dramatic contrast with the soaring popularity the hawkish candidate enjoyed when he won a landslide election victory in the November 2019 presidential derby, 11 points ahead of his main rival. 

Last week, the finance ministry issued a list of 367 imported items to be restricted, further evidence of the country’s dollar drought. The items included foreign foods, drinks, beauty products and clothes. That comes on top of the 623 imports slapped with restrictions in September,  electronic goods included.

The need for these restrictions was demonstrated in the Central Bank of Sri Lanka’s February numbers. Official reserves were down to $2.31 billion with gold reserves at just $98 million. Sri Lanka’s $81 billion economy is struggling to meet foreign debt obligations of $6.9 billion this year, and its imports totalled $20.6 billion in 2021.

The International Monetary Fund has already warned the Rajapaksa government that worse is in store. The government has so far fought shy of an IMF bailout, begging instead for funds from foreign allies like China and India as so-called “home-grown solutions.”Garment workers staged a protest at their Colombo factory in early March to demand diesel and an end to power cuts following a seven hour outage.    © Reuters

Sri Lanka has needed IMF lifelines 16 times in the past 56 years. That places it behind only debt-ridden Pakistan as a seeker of help from the international lender.

“The economic outlook is constrained by Sri Lanka’s debt overhang as well as persistently large fiscal and balance-of-payments financing needs,” the IMF said on March 2 following an assessment.

The IMF said gross domestic product growth is projected to be negatively affected by the impact of the foreign exchange shortage and “macroeconomic imbalances on economic activities and business confidence.” 

Sri Lanka’s outlook will be “subject to large uncertainties with risks tilted to the downside,” it said, forecasting inflation in double digits in 2022 with weak GDP growth of just 2.6%. That is less than the 3.6% it projected for 2021 when the lucrative tourism sector collapsed with the COVID-19 pandemic.

The government’s anti-IMF stance, a mantra of the ultra-nationalists in the Rajapaksa camp, is not winning friends among business leaders in the country known as Ceylon in its British colonial days.

The Joint Chambers, an influential network of nine business groups, urged the government this week to “pursue the support of the IMF and formulate a reform program” to contain the multiple crises. “It is better to do it today than face a far worse debacle tomorrow,” Vish Govindaswamy, chairman of the Ceylon Chamber of Commerce, told reporters this week.

Seasoned observers concur. “We need the IMF because the domestic rout has little more to offer,” Dilshan Wirasekera, chief executive officer of First Capital, a prominent investment bank, told Nikkei. “The sooner the decision is taken the better, even if there is economic pain.”

The government’s decision this week to devalue the currency hints at the first signs of the Rajapaksa administration toying with an IMF bailout. The rupee had been trading at a government imposed rate of 201-203 on the U.S. dollar. That encouraged a thriving black market in which the dollar traded at 250 rupees. The Central Bank lost millions of dollars in reserves as foreign remittances from Sri Lankan migrant workers — key to building up dollar reserves — flowed in at the black market rate through informal networks.

Colombo-based diplomats are looking for more signs to assess the extent of this about turn. “There have been mixed messages from those in government about going to the IMF,” one told Nikkei. “This confusion does not help the country.”