Sri Lanka leans on IMF and China as crucial budget test looms
Posted on October 26th, 2023

MUNZA MUSHTAQ, Courtesy Nikkei Asia

President Wickremesinghe faces growing public frustration ahead of elections

A market in Colombo on Oct. 20. Sri Lanka’s government is due to present next year’s budget in mid-November.   © Reuters

COLOMBO — Sri Lanka’s cash-strapped government is breathing slightly easier after a week that brought an agreement on more support from the International Monetary Fund and a promise of “no strings” help from China.

But the country still must climb out of bankruptcy, and President Ranil Wickremesinghe’s administration must prepare a budget presentation for Nov. 13 that will likely highlight the difficulty of balancing financial constraints with public welfare. This crucial test comes ahead of elections next year and as a weary population grows frustrated with tough IMF bailout conditions.

A case in point: The government last week approved an 18% hike in electricity tariffs, the second in eight months, following a 66% increase in February.

This is making life harder for citizens like Ashogan Kandiah, a 54-year-old tuk-tuk driver on the outskirts of Colombo. His monthly earnings of up to 65,000 rupees ($198) barely cover essentials for his family. His power bill, which used to be around 600 rupees, has soared to over 2,000. “I hope the government will consider reducing the prices of food and electricity,” he said.

Doing so, however, could put it at odds with the IMF, which has stressed the importance of shoring up government revenue with tariffs and taxes.

After the IMF announced a staff-level agreement to release a $330 million tranche late last week, Senior Mission Chief Peter Breuer said Sri Lanka’s low tax rates had contributed to its crisis, exacerbated when taxes were further reduced in 2019. When “shocks hit, the country couldn’t handle it,” he said. “The program is all about addressing the root causes of the crisis.”

Sri Lanka’s foreign exchange reserves dried up during the tenure of President Gotabaya Rajapaksa, forcing the country to default on foreign debt and leading to Rajapaksa’s resignation amid massive protests.

His successor, Wickremesinghe, is tasked with picking up the pieces, including dealing with the IMF and hammering out debt treatment with major creditors such as China. Beijing has been criticized for dragging its feet throughout the crisis — a charge it denies — but the China Export-Import Bank recently struck a deal to restructure about $4.2 billion of the island nation’s outstanding debt. That was seen as a key step to unlocking the IMF cash.

Chinese President Xi Jinping last week met with Wickremesinghe, who was in Beijing for the Belt and Road Forum, and vowed to “continue to provide assistance to Sri Lanka with no political strings attached,” according to a Chinese readout.

Chinese President Xi Jinping meets with Sri Lanka’s President Ranil Wickremesinghe in Beijing on Oct. 20.   © Reuters

What that means in practice remains to be seen. Back in Sri Lanka, the focus is on tension between IMF imperatives and public needs.

Speaking to the media on Monday, Energy Minister Kanchana Wijesekera warned of more tariff increases next year. “Due to IMF conditions, the state-owned Ceylon Electricity Board is no longer able to rely on treasury funds as it did in the past,” he said. “Hence these price hikes are necessary for the CEB to avoid incurring losses.”

Colombo economist Rehana Thowfeek stressed that IMF interventions were essential to address Sri Lanka’s fiscal and trade deficits.

“If the IMF had not intervened, the situation would have deteriorated further — fuel queues, power cuts and shortages. … It’s a misconception that it is the IMF that is increasing tariffs and imposing taxes. Of course, the IMF has recommended these policy changes, as these were what was causing the macroeconomic imbalances.”

Thowfeek said that “whether the IMF told us or not, we would have had to do these [steps] anyway.”

Professor Sirimal Abeyratne, chairman of the Institute of Policy Studies of Sri Lanka, also emphasized the IMF’s critical role in restoring stability and investor confidence. The $330 million tranche, still pending IMF board approval, may not directly benefit the people but will enhance the country’s overall economic situation, he said.

“We expect further progress with some tough reforms and new laws in the coming months. Even if they are not for the IMF, the country needs them.”

However, some critics argue that the middle and lower classes are bearing the brunt, while the IMF is too lenient on the government and state-level expenditure. Prices remain elevated although inflation has come down significantly, with the statistics department this week reporting a 0.8% on-year rise in September versus 2.1% in August.

Colombo-based activist Prasad Welikumbura accuses the IMF of favoring governments and prioritizing debt repayment over individuals. “The IMF is not a people-centric institution,” he said. “Its power is concentrated unevenly among financially strong economies, and its key figures are often heavily influenced by lobbyists from global financial firms. It is improbable for such an institution to propose a people-centric solution.”

Welikumbura argued that the IMF should focus on guiding reform of state-owned enterprises, saying it acts more as a “debt collector” in the Global South than an “adviser.”

Based on an approved bill for appropriations, total government expenditure for 2024 is expected to exceed 3.86 trillion rupees, against estimated revenue of around 1.65 trillion rupees. The recurrent budget for last year was 5.8 trillion rupees, while revenue was estimated at around 3.4 trillion rupees.

The largest allocations are earmarked for the defense, health, transport and public administration ministries, some of which are due to receive modest increases as the government vows to spend where it is needed most.

Thowfeek, the economist, warned the government may be tempted to depart from necessary reforms to secure votes in next year’s elections. “But this time, it’s harder, as the government does not have the discretion to borrow indiscriminately to fund these budget promises, and it has to meet [IMF] targets.”

Political analyst Dinidu de Alwis says Sri Lanka’s real problems are rooted in inefficiency, corruption and flawed policies. “We have a civil service and military that’s bloated, inefficient and corrupt,” he said. “Our subsidies and price controls are basically paying one group to dig holes and another to fill those up.”

The IMF’s conditions, he argued, are a needed dose of rationality.

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