New Government faces tough questions over IMF U-turn

Can the Government implement the IMF’s reforms in a way that minimises their impact on vulnerable populations?

When the NPP party swept into power just a couple of months ago, it did so on a wave of hope and promises of change. President Anura Kumara Dissanayake’s campaign was built on sharp critiques of past economic mismanagement and vows to steer the country towards a more equitable future. Yet, in a move that has surprised many supporters, the new Government has chosen to accept the IMF bailout terms negotiated by its predecessor—a decision that underscores the scale of the challenges it faces.

The $ 2.9 billion IMF deal, finalised earlier this year, comes with stringent conditions: higher taxes, reduced public spending, and reforms targeting corruption. These measures aim to stabilise Sri Lanka’s battered economy and restore international confidence. However, they also evoke memories of austerity programs that have, in the past, disproportionately affected the poorest citizens, leaving deep scars on public trust.

Dissanayake had been an outspoken critic of such deals while in Opposition, promising to renegotiate these terms. Yet the grim reality of Sri Lanka’s financial crisis appears to have narrowed the administration’s options. Walking away from the agreement would likely have further eroded the country’s standing with creditors, cutting it off from critical funding and investment. For a nation still reeling from its worst economic crisis since independence, such a risk could not be justified.

Navigating economic reality

Sri Lanka’s foreign exchange reserves have shown encouraging signs of improvement. After months of dangerously low levels that left the country unable to pay for essential imports like fuel and medicine, reserves are slowly recovering. This upward trend is fragile, heavily reliant on continued access to international funding and the restoration of global investor confidence. A disruption to this trajectory—whether through failed negotiations or political missteps—could undo the progress made so far.

The Government’s decision to accept the IMF’s terms may, therefore, be viewed as a pragmatic attempt to keep Sri Lanka afloat. It signals to international creditors and investors that the country is committed to reform, however painful that may be. This perception of stability is crucial at a time when South Asia’s economic landscape is marked by turmoil. Bangladesh, once a regional success story, is grappling with declining exports and a balance-of-payments crisis, while Pakistan teeters on the brink of financial collapse. Against this backdrop, Sri Lanka has a narrow but significant opportunity to position itself as a more stable and attractive destination for investment.

There is already evidence that this strategy is bearing fruit. Reports indicate that some segments of the textile industry are shifting operations from Bangladesh to Sri Lanka, drawn by a combination of relative stability and competitive costs. For a country that has long relied on apparel exports as a cornerstone of its economy, this trend offers a glimmer of hope. Sustaining this momentum will depend on the Government’s ability to navigate the twin challenges of economic recovery and political accountability.

Balancing growth and equity

For many NPP supporters, however, this decision feels like a bitter pill. The party’s promise of transformative change—centred on social equity and fairness—now seems at odds with the harsh measures required by the IMF. Those who hoped for a Government that championed the marginalised are questioning whether the NPP can deliver its vision while constrained by rigid fiscal conditions.

The broader public mood is one of cautious scepticism. While some acknowledge the necessity of the IMF deal, others fear further hardship, especially for those already struggling to make ends meet. Tax hikes and reduced subsidies risk deepening inequality, raising the spectre of public unrest—a challenge this administration cannot afford to ignore.

At the heart of the dilemma is a question of balance. Can the Government implement the IMF’s reforms in a way that minimises their impact on vulnerable populations? Economists argue that there is little alternative to the IMF’s plan if Sri Lanka hopes to rebuild. Decades of mismanagement have left the country with few options. The Government’s task is to design reforms that are not only effective but also equitable, ensuring that the burden of recovery does not fall disproportionately on the poor.

A political and economic tightrope

The stakes for the NPP are high. This is more than an economic test; it is a political one. The party’s ability to navigate these turbulent waters will determine whether it retains the trust of those who brought it to power. A failure to deliver tangible improvements—particularly for the hardest-hit segments of society—could lead to political disillusionment and erode the party’s mandate.

Critics of the IMF program often point to its focus on austerity, which can stifle growth and exacerbate social inequalities. Yet, history offers lessons for countries in similar situations. Indonesia, for instance, emerged from the Asian financial crisis of the late 1990s by embracing reforms that modernised its economy while carefully managing public discontent. Sri Lanka must chart a similar path, combining fiscal discipline with targeted investments in social safety nets and growth sectors.

Seizing regional opportunities

Sri Lanka’s path to recovery is not just about avoiding economic collapse; it is also about seizing opportunities for growth. The challenges facing Bangladesh and Pakistan create a unique opening for Sri Lanka to attract investors seeking alternatives in the region. The Government must act decisively to capitalise on this moment, offering incentives and streamlining processes to make Sri Lanka a more competitive investment destination.

Infrastructure, too, will play a critical role. The Colombo Port City project, long mired in controversy, could become a key driver of foreign investment if managed transparently and effectively. Similarly, initiatives to modernise logistics and digital infrastructure would signal to global businesses that Sri Lanka is serious about long-term competitiveness.

The path forward

For now, the Government has chosen pragmatism over idealism—a decision that may stabilise the economy but risks alienating its base. The months ahead will be critical. The administration must deliver tangible improvements for those hit hardest by the crisis, whether through targeted relief measures, job creation, or investments in essential services.

Equally important is the need for transparency and communication. The public must understand not only the necessity of the IMF deal but also how its benefits will be realised. Clear timelines, measurable outcomes, and regular updates can help rebuild trust and ensure public buy-in for the difficult road ahead.

Sri Lanka stands at a crossroads. The NPP’s leadership has the opportunity to steer the country towards stability and growth, leveraging its natural advantages and regional dynamics to build a brighter future. But success will require more than fiscal discipline; it will demand bold, inclusive leadership that prioritises both economic recovery and social equity. Only then can the Government hope to navigate this challenging moment and emerge with its mandate intact.

(The writer is Professor of Marketing and Head of the Department of Marketing at the University of Surrey.)