Friday Nov 29, 2024
Friday Nov 29, 2024
Friday, 29 November 2024 00:44 - - {{hitsCtrl.values.hits}}
Both the IMF and the Government officials should keep in mind that maintaining broad public support is as important as implementing necessary reforms
The new Government and the IMF have so far been in sync. For instance, the IMF underscored the importance of securing funding for social spending and supporting the most vulnerable. President Dissanayake has assured that his Government would prioritise effective use of social funds, focusing on combating child poverty, addressing malnutrition, and improving support for differently-abled individuals. These priorities, core to the NPP’s election platform, demonstrate at least some levels of alignment between the Government’s goals and IMF conditions. The mutual emphasis on social spending would also help the Government maintain its strong popularity
The current situation
Despite the political transformations that have reshaped Sri Lanka in recent months, the country’s 17th International Monetary Fund (IMF) program remains ongoing. The new Government, led by President Anura Kumara Dissanayake, was elected on a platform that promised to renegotiate aspects of the IMF deal deemed unfavourable to the people and the nation’s sovereignty. Given the Marxist label on the administration—ideologically contrasting with the neoliberal recommendations of the IMF—scepticism about the Government’s ability to successfully implement the program has naturally emerged. However, along with the Government’s explicit commitment to continue the IMF program, one crucial and often overlooked factor has the potential to shift the narrative: the strong public support behind the Government.
The IMF program
In March 2023, the IMF approved a $ 2.9 billion Extended Fund Facility (EFF) for Sri Lanka, to be disbursed over 48 months, to help the country recover from its worst economic crisis in history. The first tranche of $ 333 million was released on 21 March 2023, followed by the second and the third tranches of each $ 337 million on 13 December 2023 and 13 June 2024.
An IMF team led by Peter Breuer, Senior Mission Chief for Sri Lanka, visited Colombo from 17 to 23 November 2024, agreed on the third review for the EFF, and confirmed the Government’s intention to stay within the broad guidelines of the program. The IMF executive board approved the review the next day, resulting in another disbursement of $ 333 million, bringing total funding provided to Sri Lanka $ 1.3 billion.
However, there are further priorities to be addressed to successfully resolve the current economic crisis. For example, Peter Breuer stated that maintaining compliance with tax revenue benchmarks and advancing reforms in state-owned enterprises are essential steps toward achieving a primary surplus target of 2.3% of GDP next year. How the Government fairs with these aspects will soon be reflected in the interim Budget that will be presented to Parliament in December.
The Election
The 2024 General Election delivered a historic victory for the National People’s Power (NPP), led by President Dissanayake. The results broke records in Sri Lanka’s electoral history:
Renegotiation of terms
Renegotiating conditions of the IMF program was one of the main promises of the Opposition parties, including the NPP, prior to the Presidential election. “We are not opposed to economic targets… [but] we must consider the social impact of pursuing economic goals. We need to engage the IMF about social spending.” Dissanayake said. He also expressed, however, of ways to utilise the IMF program to advance their own agendas, such as working together on mechanisms to combat bribery and corruption.
While calls to renegotiate IMF terms may appear to be a populist move—and indeed that may be part of the rationale—there is also a broader argument that renegotiation aligns with the long-term interests of the Sri Lankan people. In June 2024, a group of prominent academics visiting Sri Lanka underscored the importance of revisiting the conditions of the EFF to ensure that the program better serves the nation’s needs, particularly in safeguarding the most vulnerable segments of society. Experts including Professor James Vreeland had also highlighted the need to address the potential adverse effects of IMF programs on the poor even before the Sri Lankan program was initiated.
The role of public support in IMF program’s success
Despite many challenges ahead of the new Government, one factor clearly works in its favour: strong public support for the new Government. A recent study by Dr. Sujeong Shim, Assistant Professor of Political Science at New York University Abu Dhabi, highlights the significant role public opinion plays in shaping the terms and the outcomes of IMF programs. The study provides compelling evidence that public opinion provides critical information about a Government’s political capital—an essential factor in assessing the likelihood of successful reforms.
Strong public backing signals to the IMF and international portfolio investors that a government possesses both the willingness and capacity to carry out necessary but often difficult reforms; strong public support provides an electoral buffer for the government to absorb political costs helping them maintain willingness to reform, while clear public mandate helps drive reforms through the legislature. High popularity thus strengthens a government’s credibility, shaping more positive responses from global financial actors.
Professor Shim’s research demonstrates that such public-driven State credibility has real consequences. Governments with stronger public support tend to secure more lenient terms in IMF programs featured with larger loans and fewer conditions. Additionally, popular governments are more successful restoring international investors’ confidence over the duration of the program. In essence, public opinion, a factor frequently overlooked in global finance, plays a critical role in shaping the behaviour of international stakeholders, including the IMF and investors.
Sri Lanka’s own history with IMF programs reinforces these observations. The 2009-2012 IMF program for Sri Lanka saw remarkable achievements with restored international market confidence and successful economic recovery. This program was led by President Mahinda Rajapaksa’s highly popular administration whose approval ratings were at times above 90%. The Government utilised its popular support and ensuing electoral victories to push forward economic reforms. By contrast, the 2016–2020 program achieved limited success amid a backdrop of political instability and declining public confidence in the Government. Once the Government lost its willingness to reform following its defeats in the 2018 local elections, international investors lost confidence in the Government, refusing to purchase Sri Lankan sovereign bonds. These examples underline the pivotal role of political stability and public backing in determining the outcomes of IMF initiatives.
An IMF program’s success hinges on the presence of a strong government with sufficient political capital. As long as a government is committed to delivering an IMF program, broad public support for the government only adds to the government’s credibility. Ultimately, it is not merely the existence of an IMF program that reassures investors, but the political leadership behind its execution that truly makes the difference.
The way forward
Dr. Shim’s research raises hopes for Sri Lanka. The new Government and the IMF have so far been in sync. For instance, the IMF underscored the importance of securing funding for social spending and supporting the most vulnerable. President Dissanayake has assured that his Government would prioritise effective use of social funds, focusing on combating child poverty, addressing malnutrition, and improving support for differently-abled individuals. These priorities, core to the NPP’s election platform, demonstrate at least some levels of alignment between the Government’s goals and IMF conditions. The mutual emphasis on social spending would also help the Government maintain its strong popularity.
Moreover, reforms such as enhancing transparency align with the NPP’s agenda to tackle nepotism and corruption, signalling a shared vision between the Government and the IMF. The departure of several entrenched political figures from the new scene further reinforces the momentum for structural change. Finally, The Institute for Health Policy’s October 2024 update showed Consumer Confidence Indices at their highest levels since 2022, reflecting rising public optimism. Coupled with the World Bank’s projection of 4.4% economic growth in 2024 due to faster-than-expected stabilisation, these trends indicate a favourable environment for advancing necessary reforms.
Government popularity is, of course, not the sole factor that shapes the success of IMF programs; various political factors including veto players, interest groups, government ideology, and democracy – matter for successful IMF programs. However, what is clear is that Sri Lanka’s new Government is uniquely positioned to leverage its strong popularity to secure both favourable terms with the IMF and successful program implementation. Both the IMF and the Government officials should keep in mind that maintaining broad public support is as important as implementing necessary reforms. There is much to be done, and with strong public backing and a commitment to reform, the outlook for Sri Lanka’s economic recovery under the current administration appears optimistic.
(Dr. Sujeong Shim is an Assistant Professor of Political Science at New York University Abu Dhabi. Her research focuses on the link between domestic politics and international economic cooperation with a focus on the IMF.)
(Sachintha Pilapitiya is a Schwarzman Scholar at Tsinghua University, China and an Economics graduate of New York University Abu Dhabi.)
