The international outlook is uncertain once again due to financial sector turmoil, high inflation, the ongoing effects of Russia’s invasion of Ukraine, and three years of COVID – according to the IMF.
Global growth is projected to significantly slow down due to high inflation, tight monetary policies, and more restrictive credit conditions. The possibility of more widespread banking turmoil and tighter monetary policies could result in even weaker global growth and lead to financial dislocations in the most vulnerable emerging market and developing economies (EMDEs) – says the World Bank.
The statements from the IMF and the World Bank highlight the current international economic situation. Sri Lankans would be burying their heads in the sand if they believe that this scenario does not affect them. Based on such a misplaced and misguided view, politicians in Sri Lanka, especially those in the opposition parties, continue to pander to this perspective and promote it as a populist vote-attracting view.
In reality, the following news item in the Daily FT summarizes the economic situation in Sri Lanka as observed by a recent IMF delegation that visited the country:
- Acknowledges Sri Lanka’s economic progress amidst challenges.
- States that sustaining reform momentum is critical to putting the economy on the path towards lasting recovery.
- Expresses concern over a significant disparity between government spending and tax collection.
- Predicts that revenue mobilization gains will fall short of initial projections by 15% by year-end.
- The government is tasked with raising revenue equivalent to 12% of GDP by the end of 2024.
- Commends steady progress in implementing structural reforms.
- Indicates that there is no fixed timeline for the second tranche of the $2.9 billion facility.
- Notes that banks will suffer from restructuring, despite maintaining financial stability.
- Opines that people are experiencing the consequences of past policies, including significant tax cuts in 2019.
The IMF staff mission team led by Peter Breuer and Katsiaryna Svirydzenka states, “The objective for the Government in 2024 is to raise revenue equivalent to 12% of GDP. So there is some way to go to get there. We are looking to the benefits of the tax reforms that were introduced last year to bear full fruit and to be supplemented with appropriate conditions. In Sri Lanka, there is a big gap between State revenue and expenditure, with expenditures at 19% of GDP and revenue at 9% of GDP” (source: Daily FT).
The Titanic obviously cannot sink again. It’s lost at the bottom of the sea. Disturbingly, several reports mentioned here and columnists writing in newspapers have given dire warnings of an impending economic gloom in Sri Lanka and a second sinking of the country. One can only hope these do not come to pass, and Sri Lanka will continue to sail through stormy waters and reach calmer surroundings sooner rather than later. However, neither the global economic outlook for 2024 nor the economic outlook for Sri Lanka leaves any room for complacency when it comes to charting a tough economic policy in Sri Lanka. With export markets shrinking and local production on the decline, the imperative of raising revenue without further burdening those who are already struggling looks bleak. If adequate revenue is not generated, the need to curtail expenditure becomes even more crucial. The recent relaxation of imports, including luxury items, does not give the impression that curbing expenditure is a priority, at least not until after 2024. The absence of incentives for exporters, as claimed by many exporters, gives the impression that the government is not focused on promoting exports, despite the rhetoric being different and loud.
In the backdrop of the IMF assessment, the following statements are worth noting, as they question the seriousness of recognizing the state of the country’s economy:
- Sajith slams the government over its failure to unlock the IMF’s second tranche. The Leader of the Opposition, Sajith Premadasa, states that the government has failed to fulfill the task it undertook to restore the country’s economic stability. He emphasized his commitment to ensuring economic development under his governance and noted that the IMF itself has stated that the government has failed to achieve its revenue targets.
- Opposition files a petition against DDO (Debt Control Order). Petitioners MPs Ranjith Madduma Bandara and Prof. G.L. Peiris argue that DDO and tax hikes will have a disproportionately negative effect on the working population. They claim that discussions and negotiations conducted by the government in relation to DDO were conducted in secrecy and request the Supreme Court to declare the actions of the Central Bank of Sri Lanka and the Monetary Board as a violation of fundamental rights.
- The collapse of the rule of law was also instrumental in the recent economic crisis in the country, as stated by Justice Minister Wijeyadasa Rajapakshe during the inauguration of the National Law Week 2023 at the Supreme Court premises. The Minister emphasized the need for people’s awareness of the law to achieve the objectives expected in a democratic society.
The economy of Sri Lanka contracted by 11.5% year-on-year in the first quarter of 2023, marking the fifth consecutive quarter of contraction. The country is experiencing its worst financial crisis in decades (source). The industrial sector saw a decline of 23.4%, with manufacturing falling by 14.2%, including basic metal and fabricated metal products and machinery and equipment. Construction went down by 38.3%, and mining and quarrying plunged by 45.7%. The services sector also decreased by 5%, mainly due to declines in insurance and financial services. In contrast, agriculture rose by 0.8%, led by rice, fishing, and cereals. The central bank predicts that the economy will contract by 2% this year, while the IMF anticipates a 3% contraction before registering a modest growth of 1.5% in 2024. The IMF stated in May that Sri Lanka is showing tentative signs of improvement, with moderating inflation, a stabilizing exchange rate, and the central bank rebuilding reserve buffers.
A food crisis in Sri Lanka is likely to worsen due to poor agricultural production, price spikes, and the ongoing economic crisis, warns the FAO and WFP (source). Approximately 30 percent of the population is experiencing acute food insecurity, and this situation is expected to deteriorate further without urgent assistance. An estimated 6.3 million people in Sri Lanka are facing moderate to severe acute food insecurity, and their situation is expected to worsen if adequate life-saving assistance and livelihood support are not provided.
Finally, a column in The Island titled “Politicos junketing while ordinaries are sinking in COL mire” appears to illustrate the strong possibility of a notional second sinking of the Sri Lankan Titanic. Many, if not all, opposition political parties, and some within the governing coalition, appear to be on the deck of the sinking Titanic, oblivious to the catastrophe about to unfold before their eyes. The string quartet of criticism is growing louder, much like the band that played on the deck while the Titanic was sinking. Unfortunately, the opposition is drowning in their own criticisms, without offering specific alternative solutions. This leads the public to their misery.
The following Daily Mirror editorial, “The IMF loan, its fallout, and the Opposition’s alternatives,” sums up this Titanic destiny very well. What we need today are not pompous statements about how badly the masses are suffering—those who are living it already know. We need to know how opposition parties plan to bring down the cost of living, raise wages without increasing inflation, and provide workers with wages that can support quality food and education for their children. We want to know how the opposition plans to increase the earnings of the Exchequer so that we do not need to borrow more and more to meet our import bill, without burdening a long-suffering population. If they have a plan for import substitution, let’s hear it. Our people need to see specific plans so they can make informed choices in the event of an election.
What the country needs urgently is an agreement between the government and opposition parties to forge a national multi-party consensus, irrespective of which party is in power, on the following six areas for a minimum period of two years:
a. Agreement on local and foreign debt restructuring programs. This is a vital necessity for the country’s future, regardless of political posturing. b. Agreement on an income tax policy, with higher income earners taxed more both in percentage and real terms than low-income earners. c. Agreement on an indirect tax policy, ensuring that the tax burden on lower income earners is proportionate to their income. d. Agreement on an expenditure policy, which includes a temporary pause on some subsidies for a period of two years. e. Agreement on a food security policy, considering the possibility of food shortages. f. Agreement on the need to reduce junkets and evaluate the value of overseas visits by government officials based on a cost-benefit analysis.
In the context of attracting foreign investments and expanding export markets, confidence in governance is crucial. A bankrupt country, with unethical politicians, rampant corruption, and a lopsided law and order enforcement system, does not inspire confidence among potential investors.
The statement by Justice Minister Wijeyadasa Rajapakshe aptly describes the situation in the country: “The collapse of the rule of law was also instrumental in the recent economic crisis in the country.” One correction needed in this statement is that the rule of law has always favored some over others, dissuading long-term investments and creating unequal playing fields for local investors.
The most pressing question for all Sri Lankans is whether opposition political party leaders will meet with the President and government leaders to discuss the six imperatives mentioned above and agree to them for a proposed two-year period. Following such an agreement, a high-level multi-party monitoring committee could ensure that all signatories abide by the agreement for the specified duration. If this happens, international lending agencies, friendly countries, and potential investors would be more encouraged to prevent the Sri Lankan Titanic from sinking again.