Reckless policy reversals could spell disaster

The islanders who remember the dark period in 2022 will never want to experience the nightmare again. The economic recovery over the last two years was based on the stability and foundation provided by the IMF Extended Fund Facility program, which was sealed in March 2023. As the country has gone through a period of relief and revival, driven by the IMF-backed economic reforms, it would be extremely reckless to indulge in policy actions that would risk the continuity of the bailout package secured from the global lender. Such a course of action would cause painful repercussions to every segment of the society.

In this backdrop, manifestos and associated pledges conveyed by some Presidential candidates cast doubts about the fate of the IMF program and the direction of the economy. Particularly, the NPP election manifesto’s declaration to prepare and negotiate an alternative Debt Sustainability Analysis (DSA) has sent shock waves across the business and financial community. The prevailing DSA represents the very foundation of the program with the Washington-based lender and if the cornerstone is not accepted, it would lead to a complete collapse of the program which macroeconomic stability is dependent upon.

As per the prevailing DSA, certain targets need to be achieved in order to reinstate debt sustainability. Accordingly, within the agreed DSA framework, public debt needs to be less than 95% of GDP by 2032, gross financing needs as a share of GDP should be reduced to less than 13% on average during the period 2027-2032 and finally foreign currency debt service cannot be higher than 4.5% of GDP per annum from 2027 to 2032.

Moreover, the Steering Committee of the Ad Hoc Group of international bondholders has stressed the urgent necessity to implement the joint working framework for restructuring the ISBs, which was agreed upon by the Government and the ISB holders in June 2024. In the light of such a development, attempting to prepare an alternative DSA is similar to committing hara-kiri because the agreement entered into with bondholders is grounded on the prevailing DSA.

During the debate that was organised by the Ceylon Chamber of Commerce last week – which featured the leading economic policy experts of the four main Presidential candidates, the NPP representative Dr. Harshana Suriyapperuma reinforced their stance to compile an alternative DSA. The manifesto of Anura Kumara Dissanayake does not specify the benchmarks of their alternative DSA, causing uncertainty and confusion. 

Alarmingly, at the debate, it was transpired that Suriyapperuma, who is the second-in-command of the NPP Economic Policy Council, did not have a proper understanding about the operation of monetary policy as well as fiscal policy. It was evident that he had not followed the developments of the country’s economy over the last decade. The former capital market regulator cum incumbent stockbroking Director was not even aware that the Treasury cannot be made a politically independent institution.

On the question of whether they would repeal the new Central Bank Act (to which the NPP voted against in the Parliament), the former SEC Director struggled to give a firm response. While the other three participants spent their time on elaborating plans and programs, the NPP representative was fond of criticising and blaming the others and extensively elaborated the oft-repeated narrative of 76-year misery. Most of the time, Suriyapperuma’s responses were not related to the questions that were posed and his phraseology of hackneyed rhetoric coupled with lack of substance did not gain admirers from the audience.

A prosperous future for the nation can only be secured by carrying forward the post-crisis economic policy reforms that have produced noticeable results. It is imperative for people to realise that Sri Lanka’s recovery is on a knife-edge path and we could easily go back to a vicious cycle in the event reckless policy reversals take place as economists have pointed out. The change must be for better, not for worse.