Fitch warns political instability could derail IMF deal progress

5 September 2022 12:01 am Views - 136

  • Rating agency says debt restructuring will mean less if political instability creeps up 
  • Lack of consensus on major reforms seen among the sections within the government  
  • Warns additional social spending may be inadequate to prevent possible public agitation 
  • Strong fiscal consolidation could dampen economic growth prospects through 2024 

 

Although Sri Lanka last week clinched the much awaited staff-level agreement with the International Monetary Fund (IMF) in its first step towards emerging out of the current economic abyss, the brewing political instability at home could hamper any progress towards realising the true potential of the deal, warns Fitch Ratings. 
Marking a victory lap, Sri Lankan authorities rejoiced at the initial agreement with the IMF after nearly 5 months of talks. But any fund disbursements out of the US$ 2.9 billion economic stabilisation package will largely hinge on if and when all Sri Lankan creditors come on board to restructure more than US$ 50 billion worth of foreign debt as China appears to remain an outlier. 


Meanwhile, there are signs of reigniting political instability once again after several factions of the governing coalition led by Sri Lanka Podujana Peramuna (SLPP) have defected, in a sign of waning majority it has in the parliament. 
Adding the total defectors thus far since March this year, political analysts put the government support at little over 100 members in parliament, spelling trouble for the government led by the President Ranil Wickremesinghe to push through the reforms he agreed with the IMF.     
If these defectors start acting in unison with the Opposition against the crucial fiscal and governance reforms, Fitch said that the IMF deal could be in jeopardy even if debt restructuring comes into place. 


“Political instability will pose risks to the implementation of reforms and the distribution of IMF funding, even if a debt restructuring is agreed,” Fitch Ratings said.
“Additional social spending may not be sufficient to prevent public opposition, particularly given that the government’s public support appears weak, in our assessment, and that the economic growth recovery in 2023-2024 will be constrained by the strong fiscal consolidation,” the rating agency said in a brief report which assessed what the IMF deal would mean for Sri Lanka.


There was widespread approval for the initial IMF deal from business chambers and many other groups soon after its announcement, but they stressed that implementation of reforms was the key. 
Since the July 09 public uprising against the insurmountable economic hardships which led to the former President Gotabaya Rajapaksa to resign in exile, there has been some semblance of progress in the conditions of the economy as at least products with rationed amounts are now largely available even at exorbitant prices, compared to total absence of them a few months ago. 


Hence, another section of political analysts are of the view that recreating political instability at this time by a few is nothing short of treacherous and unpatriotic as that would disrupt any progress that was made, pushing Sri Lanka back to square one. 
As a precursor to the IMF deal, Sri Lanka had been making good on many of the toughest reforms which it resisted for over 70 years such as cost reflective pricing of fuel and other utilities, inclination to privatise loss-making State entities and to establish Central Bank independence, which is partly responsible for the current predicament.

Unlike at any other times in history, there is a broader consensus building up among the public across party lines for privatising State entities whose employees without a shred of doubt ripped the country off for decades. 
“The IMF staff-level agreement with Sri Lanka on a US$ 2.9 billion programme, confirmed on 1 September, appears to signal a sharp change in policy settings in order to achieve macroeconomic stability,  including through large fiscal adjustment, greater exchange-rate flexibility and more Central Bank autonomy,” Fitch said. 


“This should facilitate negotiations  with official and private creditors, but the timing of any debt restructuring agreement remains uncertain,” it added. 
The interim budget presented on August 30 also set the right tone as it announced strong desire for fiscal reforms with the aim to nearly double the government revenue to 15 percent of the GDP by 2025 from 8.2 percent in 2021, with an overall deficit aimed at around 3.5 percent of the GDP, a fairly sustainable level.