Is our Government writing cheques our economy cannot cash?

Prime Minister Ranil Wickremesinghe addressed the Parliament yesterday, shedding some light on the progress made at the ongoing International Monetary Fund (IMF) deliberations. 

While these meetings regarding the restructuring of the country’s debt were delayed by the previous head of the Central Bank of Sri Lanka (CBSL) and certain Cabinet members, any further delays to await auspicious timings were rejected by the current Governor and Government. According to many independent economic think tanks, IMF talks should have begun at the very onset of the COVID-19 pandemic, or even as early as the last quarter of 2019.

Sri Lanka is now expecting a staff-level agreement to be reached with the IMF by August this year. Awaiting the IMF financial advisors proposed debt restructuring plan, Prime Minister Ranil Wickremesinghe said the financial and legal advisors representing the Government, Lazard and Clifford Chance would be ready in time for submission of the ‘Debt Restructuring Plan and Debt Sustainability Analysis’ by August, after which, provided a consensus is reached, the green light to proceed with an External Funding Facility (EFF) will be favourably considered by the IMF executive board. 

Chief Opposition Whip Lakshman Kiriella also put to rest the claims by some foreign media organisations that the talks thus far had been unsuccessful. The EFF program expectation is for four years and would largely curtail the current suffering of the general populace.

Moreover, plans for a ‘Donor Summit’ to be held in the next few months were mentioned. Once an IMF agreement is reached, a summit is necessary to gather Sri Lanka’s friends such as India, Japan and China as well as to make new friends with some in the Middle East and perhaps even resource rich Russia. 

The issue with such plans is that most “all-weather friends” have at some point been vocal about their displeasure of the current Government continuing its rule without picking a side on foreign diplomatic ties. 

There is also the issue of democratic rule being undermined if a Government that is protested out of parliamentary sessions, continue to head the negotiations of the country’s journey forward. While President and PM once again decide their alliances, the country’s priorities and future hang in the balance.

Short-term food security is likely to deteriorate while inflation can be expected. Steps taken to increase the output in the upcoming Maha season with fertiliser and other seeds provided would likely ease the pain. 

Provisions for such efforts are to be made in the interim budget, with the World Food Programme assistance also expected. While social security nets have been planned to strengthened protection for the most vulnerable groups in society, the effectiveness of these initiatives is largely dependent on the execution and funding for such projects. 

Sri Lanka’s near-term future, according to the Government, is on the right path, adjusting for the current speed bumps experienced. According to the CBSL GDP forecast, a contraction of 4 to 5% growth this year alone can be seen, while the IMF predicts a growth to fall by 6 to 7%. 

In 2023, GDP growth is predicted at -1%, notwithstanding the alarm bells of severe global economic downturn. 2018 GDP which was valued at $ 94 billion dollars would come down to $ 76 billion, and will likely improve back to that level by 2026. 

Targeting a primary account surplus – tax revenue without recurring Government expenditure and debt interest payments – by 2025, and whittling down the currently outrageous debt to GDP ratio to 95% by 2032, are commendable and even possible targets. 

However, the need for austerity would ruin any incoming Governments prospects of holding power in their term, let alone the next. The current revenue to GDP of 7.3%, one of the lowest in the world, is to be increased to 14% by 2026, by means of wide-reaching taxation that is likely to be met with the wrath of even the low wage earners. The Government continues to make bold promises and stay, while these and the term comes to fruition.