Loosening fiscal squeeze could derail IMF programme commitments: Economist

• Says there’s only room for tweaks at the margin on expenditure and revenue fronts
• Points out vote-winning quick fixes have turned out to be very costly in the past and the stakes are even higher this time around
• Stresses priority over the next few months is to build on existing progress and finalise an external debt restructuring deal before the elections

A top economist yesterday raised concerns over the “loosening of fiscal squeeze” by authorities to stimulate economic growth. Since doing so could lead to potential risks of jeopardising Sri Lanka’s agreements with the International Monetary Fund (IMF). 

Institute of Policy Studies (IPS) Executive Director Dr. Dushni Weerakoon asserted that there is only room for tweaks at the margin on both the expenditure and revenue fronts. 

“Vote-winning quick fixes have turned out to be very costly in the past and the stakes are even higher this time around. 

“A premature fiscal loosening will unsettle Sri Lanka’s creditors, as will any attempts to push down the timeline to achieve benchmark targets on fiscal ratios,” said Dr. Weerakoon in an analysis published on East Asia Forum yesterday.

The senior economist noted that creditors typically prefer early settlements to deferred settlements as the stabilisation process drags on. 
“Creditors and investors alike know that 2024 is not the end of Sri Lanka’s electoral cycle and parliamentary elections are scheduled in 2025,” she pointed out.

According to Dr. Weerakoon, this suggests the need for caution on the economic front. 

Relaxing fiscal austerity should be tightly focused on scaling back inefficient spending and using the money to target relief for the poor. In the interim, monetary policy can be used as the main tool to boost demand, while recognising that there are limits. 

“This recovery path is more anaemic after an acute economic shock, where consumers and businesses are weighed down by debt, as evident in Sri Lanka’s experience,” she said.

Dr. Weerakoon stressed that the priority over the next few months is to build on existing progress and finalise an external debt restructuring deal before the elections.

Sri Lanka is seeking a five-year moratorium from its bilateral creditors and bondholders with the intention of starting repayments in 2028.

A debt treatment plan with India and the Paris Club, and talks with China has progressed. Bondholders’ negotiations are continuing, though slow.
While a final deal will require agreement among all these private and official creditors, Weerakoon cautioned that if negotiations are not concluded ahead of the elections, the delay will add another layer of uncertainty for months to come.

Therefore, to avert future crises, Sri Lanka must take cautious and measured steps to bring about real change in its economic fundamentals. 

“This approach suggests that there is little room for boom times just yet. On the balance of probabilities, it is preferable to acknowledge that recoveries after economic crises and defaults are generally weak and fragile.

“Embracing a period of modest growth is preferable to once again plunging into chaos due to bad policymaking,” said Dr. Weerakoon.