In Sri Lanka, a long and rocky road to economic recovery

The International Monetary Fund has approved a $3 billion package for Sri Lanka. When the government implements the conditions stipulated by the Fund, it is Sri Lanka’s poor who will bear the brunt, reports Meera Srinivasan from Colombo

April 01, 2023 12:15 am | Updated 10:38 am IST

Commuters wait to board a train at the Fort railway station during a nationwide strike in Colombo on March 15, 2023. Sri Lanka deployed armed troops as trade unions protested against the high income taxes imposed as a precondition for a crucial IMF bailout.

Commuters wait to board a train at the Fort railway station during a nationwide strike in Colombo on March 15, 2023. Sri Lanka deployed armed troops as trade unions protested against the high income taxes imposed as a precondition for a crucial IMF bailout. | Photo Credit: AFP

For Sri Lanka’s ruling establishment and its backers, March 20 was a good news day. The International Monetary Fund (IMF) finally responded to the government’s distress call following the collapse of the debt-ridden economy last year, by approving a $3 billion loan aimed at restoring economic stability and growth. “Sri Lanka will no longer be deemed bankrupt,” President Ranil Wickremesinghe said during a special address to Parliament, projecting the deal, which he desperately coveted, as a crucial economic milestone. “We have the opportunity to uplift our motherland again.” Sri Lanka would “regain recognition” in the international arena, its banks’ letters of credit would be respected by international financial institutions, it would now be able to borrow low-interest loans from other international financial institutions, foreign investors’ confidence in the country would be restored, new opportunities would emerge, and the foundation to build a strong new economy will be laid, he said optimistically.

Wickremesinghe’s supporters rejoiced; some burst firecrackers. For them, it was not just a breakthrough in economic recovery, but also the political redemption of an accidental president. The United National Party (UNP) helmed by Wickremesinghe was virtually wiped out of Parliament in the last general election in 2020. His ascent to presidency was made possible only with support from the party of Sri Lanka’s disgraced former ruling clan, the Rajapaksas, who were dramatically ousted in a citizens’ uprising last year. While the diminished UNP is now represented in Parliament in a lone seat, Wickremesinghe loyalists see his credentials as a crafty, resolute, veteran politician restored in three other letters: IMF.

The IMF deal for Sri Lanka — its 17th since 1965 — entails a $3 billion loan over four years based on several conditions, including arresting corruption. An IMF governance diagnostic mission has started to assess Sri Lanka’s governance and anti-corruption framework in the agency’s first such exercise in Asia. The government hopes to tap more rapid credit, including from other multilateral agencies such as the World Bank and the Asian Development Bank. A year after defaulting on its sovereign debt, Sri Lanka is looking to borrow more to stabilise its economy.

Global scrutiny

Sri Lanka’s political parties and civil society organisations are mostly united in the conviction that an IMF programme is the “only way out” of the crisis despite the agency coming under growing global scrutiny for the painful aftermath of its programmes in indebted countries. Evidence from the developing world shows that an IMF loan is no “bailout.” Its “structural adjustment” programmes rarely see countries decisively exit debt traps. In fact, critics accuse the IMF of facilitating more external borrowing in already heavily indebted countries. Economists and foreign debt experts around the world have also been urging the IMF to suspend the use of surcharges, in addition to potentially high-interest rates, arguing that these punish developing countries, aggravate their financial vulnerabilities, and act as sanctions on a country for being poor.

In Sri Lanka’s case, the IMF officially stepped in as an arbiter of economic affairs in September 2022 when it reached a staff-level agreement with the government. Anticipating an IMF package, the government took a slew of measures, including a pre-emptive default on its $51 billion foreign debt, a sharp hike in banking interest rates, a decision to float the Sri Lankan rupee (it depreciated from around 200 to 360 against the U.S. dollar), revise taxation, and increase fuel prices and electricity tariffs.

But Sri Lankans did not have to wait for the austerity measures to fully kick in to experience the effects. They had been facing acute shortages of essentials, long power cuts, and staggering food inflation of over 90% for months in 2022. The year saw the Sri Lankan economy contract about 8%, and crash. Coming on the heels of job losses and a drastic fall in real incomes during the pandemic, the economic crisis pushed poor citizens into existential agony. Depending on supplies available, families carefully chose what to eat, and how much. Many others who could not afford the food items had to consider which meal to forego or, worse, which child to feed.

Regardless of the government’s cheer over securing the IMF programme, almost everybody in Sri Lanka admits that it will be a painful year. But there is considerably less acknowledgement that some citizens may feel the pain much more than others. While poverty is hard to miss, inequality is convenient to ignore.

Deepening disparity

For a tourist visiting any of Colombo’s upmarket restaurants or bars, the crisis would seem a dated story. Affluent residents throng these venues in their SUVs and comfortably foot big bills. Away from the music and lights, at virtually every traffic junction are men, women and children asking motorists for money — a rare sight until the crisis.

There are “many Colombos,” pointed out Kolin Peter, a community worker and digital marketing professional. Peter, 29, lives in a high-rise government housing complex in Colombo, where about 3,000, mostly working class, families reside. They were all displaced from different parts of the city as part of a “beautification” drive some years ago. “An outsider would think things are normal in our country… no more protests, no more shortages. But many families are skipping meals, pawning jewellery or taking loans just for daily survival,” he said. “Some children go to school just so they can have the mid-day meal. In some other homes, parents are unable to send children to school because they can’t afford the transport costs anymore.”

The disparity, in Peter’s view, is also geographic: “We are a small country with enviable natural resources. But every youngster outside Colombo sees a job prospect only in the capital. Why can’t the government create jobs in other areas?”

Activists from anti-government trade unions take part in a protest demanding tax reforms, outside the ports authority in Colombo in February.

Activists from anti-government trade unions take part in a protest demanding tax reforms, outside the ports authority in Colombo in February. | Photo Credit: AFP

For him, the real chances of recovery lie in addressing these glaring disparities and not merely in securing billions in new loans. “I don’t get the euphoria around the IMF programme. At the end of the day, it is a loan for an interest, right? The IMF won’t bother whether we recover meaningfully or not. What has changed for people to warrant celebrations like this? More people are starving every day and our leader is talking about holding grand Vesak (an important Buddhist festival in May) celebrations. We just don’t learn.”

The government’s exuberant celebration of Sri Lanka’s 75th year of Independence also came under attack from some. Detractors see no justification for pomp when authorities postpone local government elections citing the lack of funds, or seek urgent private funding to keep the country’s critical ambulance service afloat.

On the other hand, eager to project a positive image to attract potential foreign investors and tourists, both of which are crucial now, the government frequently spotlights the indicators that signal a version of recovery – more tourists, increasing exports, vanishing queues, waning protests, and declining inflation.

Authorities unfailingly highlight “reduced” inflation, now around 50%, but the number belies the persisting economic strain on the consumer who still pays steep prices for food and other essentials, while incomes remain stagnant or have fallen. Pointing to a “rapid erosion” of purchasing power, Colombo-based independent economist Rehana Thowfeek contended that over the long term, incomes must be adjusted in line with inflation rates to maintain purchasing power. “Last year, Sri Lanka had really high inflation rates which meant the cost of living rose rapidly. Now, the inflation rate is less than last year. A lower, positive inflation rate means the prices are still rising, but at a slower rate compared to last year,” she said. The inflation rate measures the year-to-year change in the general price level. “This year’s price increase is on top of last year’s, so cost of living is in fact still increasing,” she said.

The World Food Programme found that a third of Sri Lankan families continue to be food insecure. The government and mainstream economists see austerity measures as inevitable while reviving a battered economy. However, these “austerity measures” look different depending on whether they are abstract numbers from a selective reading of macroeconomic indicators or realities of daily life and basic survival. Inflation figures, without factoring in real wages, are deceiving. The country’s economy, after all, is that of its people.

The electricity tariff hikes are a case in point. Sri Lanka increased tariffs twice since the crisis escalated last year — first in August 2022 by 75% on average, and in February 2023 by 66%. “The hike came during acute fuel shortages, when families were struggling without gas, and food inflation had hit about 90%. Bills suddenly doubled or tripled, and consumers were threatened with notices of possible disconnection if they didn’t pay up,” said Iromi Perera, Director of Colombo Urban Lab, a think tank working on urban development policy. This coincided with the huge backlog of bills accumulated during the pandemic. “There is a misunderstanding about energy consumption in poor, working-class households,” she explained. “Some think they use about 30 units, but most families in an urban settlement use between 100 and 150 units. They need fans, lights, a refrigerator. Families switched to electric rice cookers when there was no gas. The reliance on electricity grew even more after the shortages last year.”

In what Perera termed the “weaponisation of the grid,” authorities, such as the Urban Development Authority, have issued letters and notices threatening to cut water supply for some consumers who failed to pay their electricity bills, even though the two utilities are handled by different entities.

If it is hard enough to be poor in a booming economy, it only gets much worse in an enduring crisis, where even those minimal choices available to the poor disappear. A debilitating crisis such as this has a multi-generational impact on their health, livelihood, education, and hard-earned assets. The World Bank estimated that between 2021 and 2022, poverty doubled to 25% in Sri Lanka. During the same period, urban poverty tripled. A further increase of over two percentage points has been projected for 2023. The crisis will push more people into poverty, and those already poor into destitution.

The IMF and the government emphasise the need for “social safety nets” to protect the poor and vulnerable. However, Perera sees little promise in the new enumeration exercise undertaken by the government’s Welfare Benefits Board. A questionnaire with 22 indicators will determine whether a family is poor enough to receive financial support. “This kind of targeting is cruel,” Perera said. “You can own a small house, but still struggle to put a meal on the table, still drown in debt, still be unable to send your children to school because transportation costs are so high. Targeted social welfare will also cut off many people from future social security services.” Perera argued that Sri Lanka must opt for universal social security instead.

Trade union members during a protest against the big hikes in taxes and electricity rates, in Colombo in February.

Trade union members during a protest against the big hikes in taxes and electricity rates, in Colombo in February. | Photo Credit: REUTERS

Resistance and recovery

Meanwhile, the government appears to be on guard. Trade unions protesting tax hikes or moves to privatise have been labelled “disruptors” standing in the way of stability and recovery. Police habitually tear gas agitators. Ministers threaten protesting “essential services” workers with termination of employment.

Most unions are not protesting the IMF programme per se, but the specific austerity measures that they associate with increased economic hardships. Even so, Leslie Devendra, General Secretary of the Sri Lanka Nidahas Sevaka Sangamaya (Free Workers’ Union), one of the country’s largest unions with nearly 80,000 members spanning the energy, electricity, mining, and civil aviation sectors, said that workers must “play their part” and not “add to the problem” during a crisis. “Going to the IMF was a very difficult decision to take, but there is no alternative to help us get out of this mess. Our union feels we must face the stark reality of economic recovery. That will mean everybody will have to make certain sacrifices,” he said. These include the government’s move to restructure state enterprises by privatisation, which some other unions are opposing. “Whether enterprises are run under socialism or capitalism, they have to be run according to basic economic principles. Transparency and social dialogue are very important in the reform of public enterprises.”

For Sri Lankans, the months ahead will be far from easy. A messy and likely long-drawn process of debt restructuring with a diverse set of creditors awaits the government, while ordinary citizens reel under its “corrective” fiscal measures.

Scores of people are fleeing economic deprivation, looking for educational or employment opportunities elsewhere. Official estimates show that more than a million Sri Lankans left the country in 2022. “We witnessed the Aragalaya (struggle) last year. The protesters wanted Gota (then President Gotabaya Rajapaksa) to go home and made sure he did. They also wanted a system change, but are we seeing that? The same set of politicians are calling the shots,” said Peter, voicing the disillusionment among the young. He worried that despite a historic people’s uprising, the ruling class has returned to politics and business as usual. Meanwhile, ordinary citizens continue to bear the ever-increasing cost of the crisis.“All that our politicians care about is holding on to their power and wealth,” he said.

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