The continuous economic recovery

The successful completion of the second review of the IMF bailout program last week provided a considerable momentum towards the nation’s economic recovery as it battles to come out from the worst economic crisis in its post-independent history. Subsequent to the latest review being approved by the IMF Board, the Fund would disburse the third tranche of $ 337 million to shore up the country’s foreign reserves. At the conclusion of the review, the global lender declared that the country’s economy was gradually recovering with macroeconomic policy reforms beginning to show positive outcomes.

 The encouraging development comes on the backdrop of the economy registering a commendable growth rate of 4.5% during the last quarter of 2023, albeit from a low base. The substantial improvement witnessed in macroeconomic yardsticks is praiseworthy, considering the harrowing predicament people were experiencing two years ago. Inflation has declined from a peak of 70% in September 2022 to 5.9% in February 2024 while gross official reserves have risen to $ 4.5 billion. The disappearance of 10-hour-long, daily power cuts as well as the severe shortage of essentials is no doubt a massive relief to the masses.

Nevertheless, such favourable results do not indicate that everything is perfect and rosy. But definitely the economy is on the correct track and the World Bank has forecasted that the economic growth rate would be around 1.7% this year after two years of contraction. However, in spite of improving living conditions, the cost of living remains high and many sectors that were badly affected by the economic crisis, particularly the construction industry, are yet to recover. The performance of the export sector is still sluggish although the merchandise exports increased marginally by 0.17% from a year ago to $ 983.7 million last February as per the latest statistics.

The visible improvement in the state of the country from the depths of despair two years ago has not gained much acknowledgement either from the mainstream media or the public at large, which is not surprising given the acute economic illiteracy among masses. Those who criticise the IMF-supported economic reforms have miserably failed to offer a credible alternative other than indulging in conventional bashing of the Washington-based institute. The truth of the matter is there is no alternative, and those who claim otherwise are either trying to mislead the public or have a scant understanding of economics.

The continuity of the IMF program has come under scrutiny, as this is an election year. In the quest towards becoming politically popular during times of national polls, the successive administrations have shown reluctance towards forging ahead with economic reforms, especially in relation to fiscal policy. 

Meanwhile, certain political parties have already declared they would obtain a mandate to renegotiate the terms and conditions of the IMF program once they attain power. 

Recently, NPP MP Vijitha Herath told the media that they seek to remove conditions such as exorbitant taxes and price hikes from the IMF agreement under a Government led by them. Revenue-based fiscal consolidation and cost-reflective pricing of utilities are fundamental components of the bailout deal; hence, any attempt to reverse them would seriously affect the continuity of the economic reforms that have brought about macroeconomic stability. It would also undermine the restructuring efforts of external debt owed to bilateral and commercial lenders. If the NPP is going to cut or remove taxes as implied by Herath, how are they going to recoup the loss of revenue? Would they be willing to cut down the Government expenditure?

The Government and ISB creditors are expected to begin negotiations over the restructuring of $ 12 billion bonds this week. Entering into an in-principle agreement with private creditors represents the toughest challenge of the recovery exercise, and a successful finalisation of foreign debt restructuring prior to the two national elections would be a major breakthrough in terms of turning around the economy.