Between April and June 2024, the Sri Lankan economy grew faster than anticipated, giving a positive hue to the process which the country has undertaken
As Sri Lanka goes into a critical presidential election, several issues come to the fore. None is as critical as the country's economic future. The economic crisis led to the dispatch of an elected government in 2022, and the nomination of Ranil Wickremasinghe as first the Prime Minister and then the President.
In nearly two years, a kind of national government has looked at stabilising the economy and keeping the country together, after severe public protests in 2022.
Between April and June 2024, the Sri Lankan economy grew faster than anticipated, giving a positive hue to the process which the country has undertaken. GDP increased by 4.7 per cent in this period compared to the same period in 2023; inflation has been better controlled than anticipated, running at 0.5 per cent compared to the target of 5 per cent set during the discussions with the IMF.
The government secured economic bailouts, mainly from India, of about $4 billion, and some adjustments with China, which was not as forthcoming. The Sri Lankan government secured a $3-billion bailout package from the International Monetary Fund to finance the country's recovery. In June 2024, the IMF held Article IV consultations and the second review under the Extended Fund Facility with Sri Lanka. This was the 17th occasion for SL to reach out to the IMF.
The EFF is for four years. It provided $336 million immediately. The IMF has since disbursed $1 billion. The program continues for another two and a half years. The challenge faced by the incoming President is that whatever they may say about renegotiating the IMF loan, they are actually bound for a further 30 months by the EFF.
The IMF believes that Sri Lanka is performing well, meeting quantitative targets, except for a small miss of the indicated spending on social welfare. The IMF was impressed that structural thresholds were met without delays. While the government undertook reform and policy adjustments, the economy is showing green shoots with low inflation, improved revenue collection and rising foreign exchange reserves, now at $5.5 billion. Tax revenues increased to 9.8 per cent and inflation is better controlled.
The danger signs are debt sustainability, which is poised on the edge. The Governance Diagnostic Report has scheduled recommendations for improving governance and checking vulnerabilities, reducing siphoning of government funds and assets. This needs commitment. The need to continue debt restructuring, mobilise greater domestic revenues, accrue further foreign exchange reserves are according to the IMF prescriptions for stability and fuller economic recovery. The State-owned enterprise reforms for improved efficiency, transparency, to reduce fiscal risks, and promote an even field for the private sector are required, but forces SOEs to collect proper power and fuel revenues.
These stipulations call for higher tax efforts, lower spending on public welfare, not increasing salaries, cutting unnecessary government jobs and controlling capital expenditure. In an election year, a close campaign, sees all the candidates actually seek to enhance these very aspects to woo voters, without saying that actually the IMF will curtail such activity.
There is increasing concern in Sri Lanka that particularly due to private sector employment, there is a stability in urban people's lives, they have hardships in the rural areas. Ground level interlocutors say that people who wanted to buy medicines for a month, usually now only buy it for a few days at a time, wondering where the next cash flow will come from.
While macro level accord with the IMF seems to be proceeding smoothly, there is anxiety and unhappiness among people, particularly in rural areas, which will likely impact the manner in which they vote in the presidential election.
The author is a former ambassador to Germany, Indonesia, Ethiopia, ASEAN and the African Union. He served also in Sri Lanka. Views expressed are personal.