Staying on course with economic reforms is critical

The IMF’s approval of the second review of the $ 2.9 billion Extended Fund Facility program undoubtedly provides a huge boost to the continuous economic recovery while raising the optimism of citizens at large. There has been a considerable progress in terms of striving towards economic stability over the last two years and it is pleasing to observe that people are getting on with their daily lives, representing an enormous turnaround from 15-hour-long power cuts, disruption of schools and universities, as well as an acute shortage of necessities like LP Gas, fuel, and milk powder two years ago. 

The first half of 2022 was one of the most unfortunate periods in the history of the island, characterised by despair, grief, and severe turmoil, which nobody in the country even wants to recall.

The approval of the IMF enables access to $ 336 million to support economic policies and reforms, bringing the total financial assistance under the bailout program so far to $ 1 billion. Nevertheless, the Washington-based global lender had pointed out the economy is still vulnerable and the path to debt sustainability remains knife-edged. The Fund had also emphasised that sustaining the reform momentum and efforts to restructure debt are critical to put the economy on a path towards lasting recovery and debt sustainability.

Apart from the development with regard to the IMF program, it is a relief to observe that the economy maintained its growth trajectory during the first quarter by registering a growth rate of 5.3%, marking the third successive quarter of economic expansion. However, it needs to be recognised that the growth is coming from a very low base as the economy contracted by 10.7% in the corresponding period of 2023. The inflation too as measured by the year-on-year change in the Colombo Consumer Price Index decelerated to 0.9% in May 2024 from 1.5% in April 2024, which is a respite to all segments of the society, particularly to the underprivileged.

As per the Fund, the Government has developed a roadmap to relax restrictions on the importation of motor vehicles by 2025, starting with public passenger and special purpose vehicles in 2024 Q3, and other categories of vehicles in later stages. Removing the prohibitions on vehicle imports would contribute towards increasing the Government revenue apart from benefiting automobile, banking, finance and insurance firms. 

Few ignorant commentators argue that IMF agreements limit the ability to pursue independent economic policies and undermine the sovereignty of states. They further claim the conditions imposed by such programs reduce social spending in addition to affecting the most vulnerable communities. Such uninformed opinions fail to realise that the global financial institution has evolved and progressed over time and its current structural adjustment programs include measures that protect the disadvantaged sections of the society. Despite the IMF program, the salaries of Government workers have been increased and a social safety net – Aswesuma (with the concurrence of the IMF) has been undertaken to protect the poor.

Many complain about the increased taxes – a key component of the fiscal consolidation efforts – people have to bear as a result of the global lender’s recommendations. The truth of the matter is there is no option left other than to increase the Government revenue, as there is no space left to cut down State expenditure. Last year, Rs. 3,395 billion was spent to pay salaries and wages together with interest costs, excluding all other spending, while the total revenue was Rs. 3,049 billion, highlighting the sheer necessity to implement revenue-enhancement measures. The need to increase Government revenue is validated by simple arithmetic and not by any complex political/economic ideology.

Living beyond means is no longer an option. With the national elections around the corner, voters have a responsibility to reject political outfits that advocate fiscal profligacy in the guise of system change to safeguard the well-being of both themselves and the future generation.