History, and the IMF, predictably repeat itself

On Monday, IMF Executive Board approval was provided for the New Extended Fund Facility (EFF) arrangement for Sri Lanka. This is certainly not the first time Sri Lanka found itself in a precarious position where the IMF stepped in. The value of roughly $ 2.9 billion marks a milestone in our 17th dealing with the IMF. 

This was, as repeated by the government and sources with knowledge of the matter, confirmed as early as February end. While there was only creditor assurance necessary, with China and India onboard, there was nothing stopping the bailout package. 

With this, it may have been surprising to some to see the stock market in the red; an abnormal response to clearly positive news. In reality, this event was priced-in much earlier, thereby taking away any shock value to the announcement. The 95-point drop in the ASPI resulted in some profits being realised before any other shock was to come. The question now remains what now and will this be our last?

According to the announcement, for the fiscal adjustments to be successful, sustained fiscal institutional reforms on tax administration, public finance and expenditure management, and energy pricing are critical. There is a need to also stay committed to the multi-pronged disinflation strategy to safeguard the credibility of the CBSL inflation-targeting regime. 

With this, the introduction of greater exchange rate flexibility will help to rebuild the reserve buffer. Moreover, the implementation of a bank recapitalisation plan and anti-corruption reform agenda to strengthen financial supervision and tackle corruption respectively should continue. These were all mentioned in the IMF governance diagnostic mission plan. 

But these too seem oddly familiar, echoing the same talking points of the call to action, prior to the crisis, during negotiations with the IMF on the facility and in the 200-day period after the staff-level agreement was reached last September. 

Perhaps the most concerning factor about the changes is that they are all cosmetic. From the foreign exchange liberalisation to the fuel and electricity price formulas, none of them are entrenched in law and are susceptible to change the moment all the promised IMF dollars come through or a regime change takes place. 

It is the ruling coalition’s responsibility to ensure this does not happen, by codifying the law to reflect these changes that desperately need to be made permanent. This ensures that the changes cannot be easily reversed, such as the new Central Bank Act.

Dr. Nandalal implied that the surprise, but symbolic, monetary policy tightening on 3 March was its last move. Despite this 1% policy rate hike, the CBSL anticipates market interest rates to decline further. It expected market interest rates by AWPLR and Treasury bill prices to converge with policy interest rates in 2023. Prior steps mentioned by the IMF included CBSL shifting toward a flexible exchange rate policy, the first effects of which are expected soon. 

Of its 16 programmes thus far, Sri Lanka has only completed two extended/structural programmes, the remaining 14 are relatively insignificant standby facilities or deemed derailed extended programmes. Some criticise the IMF on the same basis. Having had unprecedented bargaining power and other much-needed factors -such as a vocal public outcry for reform and a parliamentary majority to quickly effect change – the needed change was not delivered. 

More discouraging is the fact that even statutorily entrenched rules, that are set up to prevent calamitous governance are ignored. The original Fiscal Management (Responsibility) Act (FMRA), No. 3 of 2003 prohibited the budget deficit from exceeding 5% of GDP from 2006 onward. However, the budget deficit has consistently remained above the set limit, including the proposed budgets since 2021. All these factors are indicative of a troubling truth only time can confirm. That history much like the IMF repeats itself.