On the bumpy road to economic recovery

Way back in 1969, the then Opposition MP, Ronnie de Mel, speaking in Parliament quoted from a Central Bank report: "In 1968, too, Ceylon lived beyond her means. Aggregate expenditure on consumption and investment exceeded the value of goods and services produced by 3.6 per cent. Accordingly, the deficit had to be met largely by increased indebtedness abroad and foreign assistance" (Hansard, July 23, 1969).

Nothing seems to have changed over the past 50 years and more. Except that the situation has worsened. Parliamentarian de Mel said then that he was speaking as a "socialist". The rigours of foreign exchange controls, restrictions on foreign travel, food rationing and long queues for basic necessities like textiles followed a 'socialist' Government from 1970-77. A few years later in Parliament, he said he was proud to present the Budget as Finance Minister of a right-ofcentre J.R. Jayewardene Government. The economy was unlocked, imported goods flooded in and in the process, the Sri Lanka rupee plummeted to new lows.

Yet, the economy 'took off' to the point of 'overheating' with a Free Trade Zone, the first in the region, and an accelerated Mahaweli multi-purpose scheme – the centrepiece of the Government's achievements. Minister Lalith Athulathmudali started export villages with the slogan 'Export or Perish', and President R. Premadasa launched the garment factory expansion recognising the need to increase foreign exchange earnings. But the new life infused into the economy came a cropper with a foreign-backed separatist insurgency that put the brakes on that course.

Last Monday, the International Monetary Fund (IMF) announced what is a new lifeline to an economy that even 50 years ago recognised its fundamental flaw – 'Ceylon (now Sri Lanka) living beyond its means'. Its consumption and investment exceeded the value of goods. The deficit has resulted in indebtedness abroad and the need for foreign assistance.

The country's declaration last year of bankruptcy was a disgrace cast upon the people by politicians who did not read, or did not want to heed, the writing on the wall as far back as 1969.

Coinciding with the IMF bailout this week is good news from Japan which has announced plans for a USD 75 billion investment across the Indo-Pacific region. Japan's Prime Minister announced this plan in New Delhi this week calling on economically developing countries not to rely on "one country" which "breeds political vulnerability". No doubt it is aimed at countering China's growing assertiveness in the area.

It is up to Sri Lanka to tap into this reservoir of funds on offer over the next few years without compromising its neutrality. Japan has long been a friend of Sri Lanka, and was at the forefront of Sri Lanka's debt restructuring efforts however shabbily the former Government treated it due to the men in high places at that time and their endless quest to pocket money from Government infrastructure projects.

The President's brief address to the nation and later to Parliament this week underlined the fact that there are strings attached to the IMF bailout. These strings are conditional to many reforms that must follow. The statement by the IMF Managing Director made no bones about it: "For Sri Lanka to overcome the crisis, swift and timely implementation of the Extended Fund Facility (EFF)- support programme with strong ownership for the reforms is critical".

This would ordinarily mean that the IMF expects not only that the incumbent Government will keep its promise to implement the IMF reforms, but also that future Governments will take "strong ownership" of these reforms. Such reforms are phased out over 48 months when there could be a different political party in office.

These reforms which the IMF refers to as "deep reforms", touch several nerve-centres of the economy, ranging from macro-economic stability to debt sustainability, close collaboration with Sri Lanka's creditors abroad, tackling the recession, high inflation, depleted reserves and unsustainable public debt – all this and more while protecting the poor, and consistent with the IMF-supported bailout programme.

There is a sting in the tail of the IMF statement. That refers to the need to tackle corruption calling on the authorities for a more comprehensive anti-corruption reforms agenda guided by the ongoing IMF governance diagnostic mission. The IMF has warned of political instability and social unrest – and public dissatisfaction from corruption, something the Government claims it has framed the most stringent anti-graft laws to counter, but is far too slow in implementing.

There is justifiable cynicism that the country is celebrating getting a loan, not having repaid a loan. The loans that the country has taken over the years have been officially classified as "unsustainable" and that negative tag has not been removed by the IMF. Leave alone the private creditors, bilateral loans have to be settled with not only India and China, but Pakistan, Hungary, Iran, Kuwait and Saudi Arabia. All totalling USD 50 billion. It is well and truly a debt trap. Present, future and unborn generations will be borrowing from Peter to pay Paul unless the economy can be turned around.

As much as a third (33%) of households in Sri Lanka continue facing some form of food insecurity according to the World Food Programme. The mass exodus from the country during the last few months with tacit Government encouragement so that foreign remittances from migrant workers can shore up reserves, is not exactly what a healthy, vibrant economy should be.

The global economic environment is not too rosy either. The West is feeling the impact of the Ukraine war and recessions are knocking on the doors of Europe and the US. Interest rates are being revised constantly to check inflation. Millions of pensioners are worried. Should escalating tension in the IndoPacific region closer to home explode to a full blown conflict – or another unknown, unseen virus hit, Sri Lanka will be knocked out cold.

The IMF bailout is not the beginning of the end, but only the beginning of the beginning, on the long and bumpy road to economic recovery. But at least it is a start.