The ABCs of the IMF

Sri Lankans find themselves in tough times, with rougher times to come. The old adage “desperate times, call for desperate measures” cannot be more prevalent as everyone plans according to power outages, strategises traveling with fuel constraints while avoiding long shed queues and cut down on meals. 

While everyday citizens and businesses are forced to adapt to this belt-tightening, the higher ups grapple with a dirty word its bearer that they themselves manage to avoid: austerity by going to the IMF.  

One only need consider the looming economic crisis, when considering the necessity to go to the International Monetary Fund (IMF). With the Easter Sunday attacks and COVID-19 pandemic, the tourism industry which previously brought in $ 4 billion, lost its ability to contribute foreign currency while Sri Lankan export market disruptions prevailed. 

This, coupled with server economic mismanagement, has led the economy to the brink of default, desperately trying to negotiate the terms on loans with allies. Failure to honour repayment of the International Sovereign Bond of which $ 1 billion is maturing in July – with a total of $ 7 billion liability for this year – also compromises our ability to borrow in the future. 

This lack of dollars has also led to a multitude of product shortages severely dampening the quality of life. With sharp price increases in essential imported items such as fuel, kerosene oil and milk powder, an IMF solution maybe best to prevent the situation from worsening.

However, there is a concerning lack of consensus on this way forward. Since coming into power, the current Government undertook reforms that would otherwise fly in the face of sustained macroeconomic management. Tax breaks that made Sri Lanka one of the lowest taxed countries in the world, were welcomed among other populist stances. 

While these can be accommodated by perhaps oil rich countries and low dependency rate economies, our democratic socialist republic would not weather well when the bills come in. Moreover, trade barriers such as import restrictions and a controlled exchange rate regime – the latter of which was now abandoned, kept adding pressure on the spending bill. The Government was punching above its weight class, and has a few final rounds remaining before the final round’s bell is rung.

In essence the role of the IMF is to promote the stability of the international monetary and financial system and individual member country’s macroeconomic stability. They are a choice negotiator to have in debt restructure talks and while it may not pay our bill for us, it would reassurance foreign investors to perhaps more favourable terms. 

While bilateral talks with India and China are by no means dismissible, they can only go so far without the framework of a comprehensive plan to which resources are available. Therefore, a drastic step is needed without merely postponing a crisis that is snowballing. The State belt-tightening is inevitable.

Austerity, referring to Government cutbacks on non-essential spending, it is often dreaded due to the dampening effect it has on overall economic growth. This may mean trimming military expenditure whereas healthcare should have less cuts, given the ongoing pandemic situation. Another likely recommendation would be to raise interest rates and subsequently, the saving rate. Such monetary policy tightening is usually looked down on during periods of economic downs. 

However, given that inflation too has been steadily on the rise, reduced spending maybe desirable to try and mitigate cost push inflation. Moreover, this move should be considered given its likeliness to attract foreign investment as well and help improve our balance of payments. Another popular IMF action point that the Central Bank recently adhered to was the free float of the LKR. Asset sales and dismantling subsidies might too be recommended as the road to recovery. 

Therefore, with all this to consider, even the nay-saying Keynesian’s and proud big Government supporters would be wise to take heed. When the going gets tough or rough, even the toughest and roughest cannot stand alone.