Packed, sealed and delivered

Packed, sealed and delivered. That’s one description of the nearly US$3 billion bailout package of the International Monetary Fund (IMF) to alleviate Sri Lanka’s economic ills.

There was a lot of euphoria over this deal with firecrackers being lit on Tuesday by residents in some parts of the country, prompted probably by the ruling political authorities as a winwin for Sri Lanka. The business community was scrambling to understand the nuances of the IMF announcement and this week was tuned into a plethora of discussions, debates and presentations by the research community analysing the deal with their own spin on it. Never before has an IMF package attracted so much attention and debate.

But the crisis is not over; the hard times are ahead with the garment industry, for example, being hit by a 20 percent drop in orders, which has resulted in 50,000 jobs being lost.

The government has been able to tick off all the boxes of the pre-conditions of the IMF package and, ahead of a possible sale of state ventures, was Monday’s announcement that the government has decided to sell off stakes in Sri Lanka Telecom and Lanka Hospitals.

As I pondered over these issues, my attention was drawn to the conversation under the margosa tree by the trio. “Aei janathawa mechchara udyogimath wela inne jathiyanthara muulya aramudala ganu-denuwa gena. Samahara palaath wala raththing-nath paththu kara (Why are people so excited by the IMF deal? In some areas, firecrackers were lit),” said Mabel Rasthiyadu.

“Eh deshapalanayange weda wenna ethi. Janathawata avabodhayak nae ne mekath nayak kiyala, api aapahu gevanna oney kiyala (That must be the work of politicians. People don’t realise that this is also another loan which we have to pay back),” said Kussi Amma Sera.

“Okkoma kattiya den jeevath-wenne naya methane mee davas wala, mokada padiya madi hinda (Everyone is surviving on loans these days as the salaries are not enough),” added Serapina.

I agreed with all that they said and wanted to also discuss this with some of my ‘friends’. As if reading my thoughts, the home phone rang on this Thursday morning with Ruwanputha, the young economist on the line, wanting to discuss – and you guessed it right – the IMF deal.

“So the IMF deal finally worked out,” he said. “Yes, the gains will come with some pain. It’s not all hunky dory for Sri Lanka,” I said.

“The next critical development is the submission of a clear debt restructuring plan by the Government by end April 2023. This would also decide the fate of domestic debt restructuring which foreign creditors are demanding while the banks are resisting this move,” he said.

“Banks have been advised to recapitalise on the possibility of a domestic debt restructuring, meaning that in the event of domestic debt restructuring the banks would have sufficient capital to face such a move,” I said.

A new element in the IMF package is that a portion of the funds could be used by the Government as budgetary support which would reduce its dependence on funds being raised by the Central Bank, on the Government’s behalf, via Treasury bills and bonds.

The IMF, announcing the approval of the package, said that budget 2024 (to be presented in November 2023) would be in line with the IMF programme, while Parliament’s approval of the new Central Bank Act in consultation with the IMF, has been sought.

An asset quality review of a bank diagnostic exercise of the two big state banks and three largest private banks will take place, while anti-corruption legislation would be implemented by end June 2023. Parliament approval of a welfare benefit scheme will be sought, while restructuring balance sheets of state entities – SriLankan Airlines, the Ceylon Electricity Board, the Ceylon Petroleum Corporation and the Road Development Authority.

Property, wealth and wealth transfer taxes will be implemented by January 2025, the VAT system will see the abolishing of the vast amount of exemptions to be implemented by January 2024. A plethora of other measures including tax hikes and pass-on hikes in electricity and fuel pricing have been implemented and are based on IMF conditions.

According to many analysts (there were many views this week on this vital and life-saving deal), the most likely scenario is that the Central Bank holding of government securities will be re-profiled or subject to haircuts (cuts in capital investments).

In the past few days, the country has been overwhelmed by the euphoria over the deal, with the Government making maximum use of this positive development. For example,

President Ranil Wickremesinghe either issued statements or spoke on at least three occasions on the IMF bailout – a statement on Monday night, followed by a statement in Parliament on Wednesday and addressing a news conference on Thursday.

Another condition is that the recent introduction of a flexible exchange rate policy is expected to positively enhance the country’s efforts on rebuilding the foreign currency reserves. The rupee gained during the week to around Rs. 320 against the US dollar, compared to Rs. 360 a few weeks ago.

However, there are daunting challenges ahead as conditions for the loan include increasing taxes, reducing the import bill, improving exports, cutting Government spending particularly on loss-making state-owned enterprises and passing-on without absorbing fuel price hikes in the international markets, among others.

According to the IMF, Sri Lanka has received $3.6 billion in the period 1965 to 2019 out of $4.4 billion with a balance of $715 million not being disbursed as this programme which started in 2016 ended in 2019 without successful completion. Seven of them were terminated early. The most recent agreements were in 2003, 2009 and 2016 ($1.5 billion which was unfinished). Will we successfully complete the latest arrangement? Only time will tell.

The Ceylon Chamber of Commerce was among many in the business community that welcomed the IMF announcement. “The country cannot afford to revert to an unsustainable subsidy driven economy and a fiscal deficit that is financed by the Central Bank. We believe this is a crucial point for the economy, with the implementation of long overdue economic reforms acting as a vital impetus towards sustainable economic revival,” the chamber said in a statement.

Some of the new elements of this package include anti-corruption measures. In its 150-page reforms proposal, the IMF said a more comprehensive anti-corruption reform agenda must be implemented and guided by the ongoing IMF governance diagnostic mission that conducts an assessment of Sri Lanka’s anti-corruption and governance framework.

Just as I completed my column, walked into the office room with a mug of steaming tea, leaving me to reflect on the daunting challenges ahead for the country if it is to successfully complete this 17th time, 4-year package deal.