ON THE IMF, POLICY FAILURES, STILL-BORN REFORMS AND CRACKPOTS ON THE LUNATIC FRINGE

Echelon features the forthrightness and profundity of insights from Dr Indrajit Coomaraswamy, Former Governor of the Central Bank of Sri Lanka, Bingumal Thewarathanthri, Chief Executive of Standard Chartered Bank Sri Lanka, and Murtaza Jafferjee, Managing Director of JB Securities, who participated in an online forum on ‘What is next for Sri Lanka in the wake of IMF Programme’ organized by The Centre of Banking Studies of the Central Bank of Sri Lanka.

PROTECT REFORMS AGAINST CHANGING GOVERNMENTS – BINGUMAL THEWARATHANTHRI

We must be clear that we are not yet out of the woods, despite the outstanding work done by Sri Lanka in achieving the EFF in just six months, which compares favourably to other countries such as Zambia and Suriname. While this is certainly a big win, we should not over-celebrate and forget the challenges we faced last year. In terms of IMF reforms, there are multiple targets, including fiscal and debt-to-GDP reforms, as well as primary surplus targets by 2025. However, it is important to remember that a debt restructuring process is still underway, and we must remain patient and calm. The government is expected to announce restructuring parameters in April, and clarity will come after the debt exchange document is signed. While an upgrade in ratings is possible, this will depend on how committed we are to the reform programme beyond what the IMF is asking us to do. Beyond meeting IMF guidelines, there is a need to repurpose and resize the government sector by creating a repurposing plan for at least half a million employees. Paying the right people better is crucial to attracting talent and retaining professionals, such as doctors. This is an important step towards making the government sector more efficient and capable of making decisions quickly.

While we will receive some funds from the ADB and World Bank, we need to find capital, which can only come through FDI. However, FDI is scarce these days as capital is difficult to find due to struggling global markets. To attract investment, our investment policy must be stable and documented at a constitutional level to prevent changes by future governments. We need to identify the strategic pillars that will take the economy to the next level and create a legal framework to support them.

To attract investment, our investment policy must be stable and documented at a constitutional level to prevent changes by future governments. We need to identify the strategic pillars that will take the economy to the next level and create a legal framework to support them

NEEDED: A SPECIALPURPOSE BODY TO IMPLEMENT THE IMF PROGRAMME – DR INDRAJIT COOMARASWAMY

Securing the IMF Extended Fund Facility is only the beginning, there is a long way to go. But let us first remember what we had to experience less than a year ago.

We had acute shortages of essential goods, long queues, and even deaths, all while prices soared. The currency collapsed, inflation was rising, and the central bank had to increase rates. All this occurred within the last six to nine months. While things have significantly stabilized to an extent, there is no room for complacency.

We have no room for complacency because the economy contracted by a sharp 7.6% in 2023, and we need macroeconomic stability where the economy is growing by at least 4%. So, Sri Lanka, has its work cut out for itself, but the passage of this IMF programme is a commendable starting point, the former Central Bank Governor argued. The fact that the Paris Club has endorsed our efforts, which includes the G7 countries, and India and China among non-Paris Club creditors, to move towards sustainability is a positive sign.

“With the IMF programme to back us, we still have a herculean task ahead of us, and the three most important priorities will be implementation, implementation, and implementation”.

Addressing a Perennial Problem

Implementing reforms has always been a weakness for Sri Lanka. While we have already taken some tough structural and institutional reforms as prior actions to secure this IMF facility, there are more critical reforms needed to secure the country’s economy. Sri Lanka needs to maintain a laser-like focus on implementation and follow through with the IMF programme. If the programme gets suspended, it could have dramatic consequences. We cannot relax or think that we have achieved more than we have. We cannot give up the need for discipline, which we have never exercised before.

What lies ahead for Sri Lanka now that it secured an IMF programme? Success demands discipline and a markedly different approach to economic policy-making. Sri Lanka’s past (16) failures with IMF programmes point to the underlying lack of implementation on the part of the authorities. To avoid a similar fate this time around, we must prioritize strict adherence to the programme’s targets and benchmarks.

We have the example of Ireland’s success story of implementing an IMF programme during the global financial crisis. They created a special authority that answered directly to the Prime Minister tasked with implementing the IMF programme with exceptional focus and meticulousness. Sri Lanka needs to emulate this degree of laser-like attention to detail.

We must identify all necessary actions, assign responsibilities, and monitor progress carefully. Any impediments to the programme’s implementation must be dealt with immediately. The last thing Sri Lanka needs is for the programme’s suspension due to a failure to keep it on track. That would negatively impact the country’s financial flows and undermine the confidence that the programme has generated.

We also need a shift in focus towards natural restructuring, with a different emphasis on getting financing assurances from bilateral donors and commercial creditors. By implementing these strategies, Sri Lanka can stay on course towards long-term economic growth and stability.

Misconceptions about the IMF

People are apprehensive that the IMF’s involvement will result in severe austerity measures, with cuts to essential services that bring harm to the most vulnerable. However, we have experienced significant austerity measures already since the second quarter of last year, and the IMF was not in the picture. In fact, we delayed seeking IMF assistance, which made the situation even more severe. Thus, we cannot attribute our economic challenges solely to the IMF’s austerity measures.

The IMF provides financing support to countries facing macroeconomic imbalances, requiring them to take necessary austerity measures to achieve balance. The organization also catalyzes other financial support to make the adjustment more manageable. However, we had to make adjustments without any financing support in the past. Now that the adjustment has already taken place to a significant extent, financing support will come to aid us. While we need to attempt more adjustments, we hope to be in a better position to support those most adversely affected by stabilization policies.

The government has placed a high priority on strengthening the social safety net, ramping up cash transfers, rationalizing social safety nets, and improving its design to ensure those who need help receive it. The IMF programme also emphasizes a robust social safety net dimension. While there are fiscal and revenue adjustments and expenditure controls, the programme also makes a significant effort to build up the social safety net. Finally, we must undertake structural reforms to strengthen the economy’s growth framework for sustained progress. Past programmes have had both a stabilization component and a structural component, with relative success on the former but limited progress on the latter. We need to build a competitive, export-oriented economy, which we have failed to do despite decades of anti-export bias in our policy framework. We must improve the business climate, facilitate trade, and pursue trade agreements that could transform our export capabilities. If we fail to do so, we risk becoming a serial defaulter like Argentina or falling behind countries like Zimbabwe. While the situation may seem discouraging, we have made significant progress in implementing tough measures and must continue to sustain them and drive further progress through the program’s implementation unit.

The IMF programme also emphasizes a robust social safety net dimension. While there are fiscal and revenue adjustments and expenditure controls, the programme also makes a significant effort to build up the social safety net

IMF PROGRAMME BUT SRI LANKA’S REFORMS – MURTAZA JAFFERJEE

Bashing and vilifying the IMF is a national pastime, with politicians playing to the gallery for over 75 years after independence. There’s a whole bunch of people, a whole bunch of crackpots at the lunatic fringe, who have nothing better to do, and instead of focusing their efforts on trying to go after the people who created this crisis, think it’s fashionable to bash the IMF.

Any conscientious Sri Lankan has an obligation to read the Memorandum of Economic and Financial Policies between Sri Lanka and the IMF. From page 84 onwards, this memorandum lays out everything Sri Lanka has to do under the EFF programme. However, all the reforms mentioned there are what we have proposed; the IMF is not telling us we should do those things. In fact, many of the proposed reforms are things that we have been talking about for the last 20-30 years.

For example, SOE reforms started, in my recollection, in the 1980s under Premadasa with people-ization, so this is a continuation of a 40-year journey. The second is about central bank independence. I have been hearing about central bank independence for 25 years. So this is noth – ing new; this has been in the national debate for many years. Most of these ideas are homegrown programmes. Just because it is in an IMF document, it doesn’t mean the IMF is telling us what to do: that is a critical distinction because our hearts and minds must be behind these reforms. They are for our benefit.

Unfair Reforms and Market Economy Sri Lanka has a significant balancing challenge. So you have the taxpayers through which channel the fiscal effort is coming, and then you have the creditors. Now the issue that I have is that everybody who can afford to should participate in this adjustment programme. You can’t cherry-pick some people and exclude them from the adjustment programmes. If people can afford to pay taxes they should do so, and the recent income tax changes, I believe, were the right thing to do. But the problem that I have with the tax policy of the government currently is that some people got exempted which doesn’t seem to be very fair.

Then you have the various BOI agreements that gave generous tax concessions for unreasonably long periods of time. So you have an instance where a company is paying an exorbitantly higher tax compared to a BOI company in the same industry which isn’t very fair either.

Then you come to the debt. So there is talk that if there’s a domestic debt restructuring, certain people will be exempted and certain people will have to participate. My belief is it should go instrument-wise; everybody should participate because if you argue the case that we can’t have domestic debt restructure for the banks, you are not bailing out depositors, I don’t believe it would come to that, but you are bailing out shareholders and the tier two bondholders. So my sense of what happens next in terms of economic reforms has to be based on fairness and that everybody who can afford to should pay the price. The next important thing is the Social Security net. The IMF has made a conscious effort to ensure that the government does not compromise on social safety nets, and that is only humane to do that because income distribution in Sri Lanka is skewered. Vulnerable groups are in a deprived situation, and it is the obligation of a country that calls itself the Democratic Socialist Republic to make those necessary transfers.

Finally, it seems like we’re going to embrace the market economy. Finally, we could have an independent central bank that cannot print money. Interest rates are going to be market determined. Foreign exchange rates are going to be market determined. Hopefully, the SOEs also will have to compete in a competitive market environment. So after many, many decades, this will be an economy that will work on market principles, and the underlying principle is competition. So what we could have, if we persist with the necessary reforms, are very different outcomes that would uplift all 22 million of us citizens.

Bashing and vilifying the IMF is a national pastime, with politicians playing to the gallery for over 75 years after independence. There’s a whole bunch of people, a whole bunch of crackpots at the lunatic fringe, who have nothing better to do, and instead of focusing their efforts on trying to go after the people who created this crisis, think it’s fashionable to bash the IMF